Broadcom's a Buy Now That It's Cutting Its Ties to Wireless

NEW YORK (TheStreet) -- After almost two years of underperformance, Broadcom (BRCM) stock received a much-needed boost Monday, surging as much as 16% after management announced that it was pursuing strategic alternatives for its struggling cellular baseband/wireless business.

After just missing a new 52-week high during the session at $36.05, shares eventually settled down, closing Monday at $34.84, up 9.32%. Broadcom stock is up nearly 18% for the year to date.

Even though the term "strategic alternatives" is commonly used by management to imply intent to sell a struggling asset, the market cheered the news. For Broadcom, which was falling further behind market leader Qualcomm (QCOM), it was a matter of "when" not "if" it would dispose of the baseband business.

While Broadcom has always had the advantage of chip placement within devices from both Apple (AAPL) and Samsung (SSNLF), the company has suffered amid high-end device saturation and low average selling prices. This has caused to meaningful drop in profits over the past three years.

Management has tried to offset the declines with some key moves, including its $164 million acquisition last year of LTE-related assets from affiliates of Renesas Electronics Corporation. Broadcom was looking to strengthen its position in the LTE (long-term evolution) standard and command better/more adoption in mobile devices. But it hasn't worked.

In the most recent quarter, Broadcom's baseband business posted a $32 million operating loss. It no longer made sense for the company to invest roughly one-fifth of its operating expenses to pursue a business segment that was not pulling its weight. Not to mention, Qualcomm's market share was widening, while smaller players like Avago Technologies (AVGO) are gaining steam.

If you liked this article you might like

Cramer: Dominoes Are in Play Today

Fedex, Apple Are on a Roll Explains Jim Cramer

Cramer: These Stocks Are Playing Catch-Up

Toshiba Reportedly Favoring Broadcom in Flash Business Sale

Bank Earnings Are at a Critical Turning Point: Cramer's 'Mad Money' Recap (Wednesday 4/12/17)