Shares of Irvine chip maker Broadcom Corp. plunged to their lowest price in three years as investors worried that smartphones and tablets will be increasingly outfitted with wireless chips made by rivals.
Nearly all Apple iPhone and Samsung Galaxy users who connect to a Wi-Fi network or turn on Bluetooth are able to do so because of a Broadcom wireless networking chip that costs about $5 a phone. A third of Broadcom's business comes from those two device makers.
But in recent weeks, analyst reports related to Samsung and Apple have suggested that the number of first-time buyers of smartphones is slowing. Both companies have also made moves signaling an interest in making their own chips.
On Tuesday, Broadcom reported lackluster quarterly results for its wireless chip unit and estimated that revenue would be stagnant in the current quarter. The other half of Broadcom's business — broadband, television and networking equipment — surged about 12% quarter-over-quarter in the period ended June 30, Broadcom reported. But analysts said that wasn't enough to assuage investors' anxiety over the company's prospects.
"Just these ideas and the fact that Broadcom has been primarily been driven by wireless connectivity is significant," said Tristan Gerra, semiconductor analyst at Robert W. Baird & Co. "Market share is going down instead of going up."
Broadcom shares slipped $4.82, or 15.1%, to $27.01 on Wednesday, the biggest drop since October 2007, according to Bloomberg. The decline prompted analysts to raise the possibility of the company cutting costs or spinning off units to pump up the stock.
"The quarter was weak, but the market may be overreacting to concerns about their competitive positioning," said Romit Shah, managing director and senior analyst at Nomura Securities.
Yet the analysis firm Chipworks recently reported that one variant of the new Galaxy S 4 Mini uses a Qualcomm Inc. chip instead of one from Broadcom, which has typically been the chip maker of choice for Samsung.
Broadcom Chief Executive Scott McGregor rebuffed the mounting concerns in a call with analysts Tuesday, saying the company's market share would be stable.
"A lot of these reports have made a big deal of the [contracts] we don't win, but they fail to point out the ones that used to be our competitor that we are winning," he said. "And so we're gaining share in some of the customers other than the one that some of those reports have pointed out."
Broadcom also makes the so-called baseband chips that connects devices to cellular networks. But it's at least another year away from delivering significant revenue from a chip capable of connecting to the newer 4G LTE networks.
In terms of worldwide sales, Qualcomm holds 52% of the baseband market and has more than 75% of the LTE market, according to research firm Strategy Analytics. Broadcom's numbers: 5% and nonexistent. The effect of falling behind started to show this week.
Cowen and Co. analyst Timothy Arcuri pointed to a nearly 40% decline in the last year in sales of cheaper, older 3G chips.
"That's an incredible decline," he said. "Usually, you think maybe 10%."
McGregor acknowledged on the call that the company doesn't have many 3G customers because many smartphones have transitioned to the faster 4G service.
Broadcom may have to pull out of the cellular-chip business, said Cody Acree, Williams Financial Group's director of equity research.
"Does it make sense to spend this kind of capital to fight this volatility?" he said of the hundreds of millions Broadcom has spent on LTE research.
To add to the concerns, Shah said it has been "more or less confirmed" that Apple has purchased chip technology from Texas Instruments, which recently dropped out of that market. It's unclear what Apple plans to do with the purchase.
"This could be something that just helps improve their other services," Shah said. "They might just be getting some technology that would help them improve their inferior Maps product."
A year ago, Samsung bought British chip maker CSR and analysts remain worried that Samsung could slowly move some chip-making in-house.
Still, some analysts see potential in Broadcom. Its high-end chips could soon power upcoming devices such as Apple's rumored iWatch or other "wearable" computers.
"Apple and Samsung over the next couple of years will proliferate the number of the devices they're selling to bigger-size phones, wearable devices and mid-range phones," Shah said. "For Broadcom to sustain growth, it has to be driven by new product categories, like wearables, and improved traction in the baseband business."