Investment bank JPMorgan believes iPhone maker Apple (AAPL) is the most likely buyer of Broadcom's (AVGO) wireless chip businesses. Broadcom stock rose on Tuesday.
XSan Jose, Calif.-based Broadcom reportedly is seeking bids for the businesses after reclassifying them as "noncore" assets two weeks ago.
"We believe that Apple could be a primary suitor among system (manufacturers) for the whole business, while MediaTek could be an interested party for the RF (radio-frequency) assets," JPMorgan analysts said in a report Tuesday. "We also do not rule out a scenario where a financial investor could be an intermediary buyer, given high FCF (free cash flow) generation from these businesses."
Broadcom's wireless assets include three businesses that could be sold together or separately, JPMorgan said. Those businesses are radio-frequency chips for wireless communications; Wi-Fi, Bluetooth and GPS chips; and touch controller and wireless charging application-specific integrated circuits.
Broadcom Stock Rated Buy As Chip Assets In Play
JPMorgan rates Broadcom stock as overweight, or buy. On the stock market today, Broadcom stock rose 0.3% to 320.50. Meanwhile, Apple stock hit a record high of 284.89. Apple stock ended the day up a fraction to 284.27.
Broadcom's RF chip business contributed $2.2 billion in revenue in the company's fiscal 2019. It is a market leader in high-end power amplifiers and radio-frequency filters.
The RF chip business is likely of special interest to Apple as it tries to reduce its reliance on Qualcomm (QCOM) for RF chips, JPMorgan said.
Taiwan-based MediaTek also is a potential suitor as it seeks to bulk up its RF chip portfolio, the investment bank said.
Another possible buyer, Skyworks Solutions (SWKS), probably doesn't have the balance sheet strength to pull off such an acquisition, JPMorgan said.
Broadcom's Wi-Fi, Bluetooth and GPS chip business contributed $2 billion in fiscal 2019. Apple and Samsung are major customers.
"Given most of the revenues for this unit also come from Apple, it appears that Apple could be the most likely acquirer," JPMorgan said.
Other potential bidders include MediaTek, Murata and Skyworks, it said.
Broadcom Wireless Chip Businesses Hurt By Underinvestment
Broadcom's touch controller and wireless charging business generated $1 billion in sales in fiscal 2019. But Broadcom said it sees revenue falling to $500 million next year. The reason for the decline is the likely loss of contracts for touch controllers.
"There is unlikely to be much interest for this asset among merchant silicon vendors and it could be likely acquired by Apple, probably at a discounted price," JPMorgan said.
JPMorgan analyst Harlan Sur values Broadcom's wireless chip businesses at $18 billion in total. That includes $11 billion for the RF business, $6 billion for Wi-Fi and connectivity business and $1 billion for the remaining business.
In a report last week, Baird analyst Tristan Gerra said Broadcom's wireless businesses suffered from the company's underinvestment in research and development.
"The downside of R&D underinvesting is becoming apparent, driving the reclassification of original Broadcom's high-value wireless business as noncore," Gerra said.
Gerra rates Broadcom stock as outperform with a price target of 400.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor companies.
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