Entropic Plunges on Broadcom Fears
As analyst Andrew Schmitt of Nyquist Capital pieced together recently, Broadcom is working on a GPON chipset. Separately, Broadcom acquired Octalica last year, giving it technology for the Multimedia over Coax Alliance (MoCA) standard, which runs home networks over coaxial cabling. (See Broadcom’s PON Chips and Broadcom Jump Starts MOCA Strategy.)
What happens when you put those pieces together? You get an integrated chipset -- implying it's a smaller and cheaper option than buying separate chips -- that could fit nicely into Verizon Communications Inc. (NYSE: VZ)'s eventual GPON deployments. (See Verizon Brings GPON Home.) And it's something Entropic, which specializes in MoCA chips, doesn't yet have.
The clues were there when Schmitt revealed the GPON piece. (See Broadcom Breaking Into GPON?) But analyst Gary Mobley of Piper Jaffray & Co. spelled out the situation in a note issued this morning. That sent Entropic earthward, closing down 82 cents (21.93%) to $2.92 each Tuesday. But buyers swooped in after-hours, sending Entropic shares up 82 cents (28.08%) to $3.74, at last check.
Broadcom won't comment on whether it's got GPON going, by the way.
What makes this particularly threatening to Entropic is that, according to Schmitt, Broadcom's already gotten a win at Alcatel-Lucent (NYSE: ALU), a primary GPON supplier for Verizon.
"What wasn't seen [after the Octalica acquisition] was the fact that Broadcom had figured out a way to accelerate the acceptance of this silicon," Schmitt says. "You know how difficult it is for a technology to get accepted by a carrier."
In other words, Broadcom could soon have a MoCA part qualified at Verizon. And that would be catalyst enough for other equipment vendors to start looking at Broadcom's chips, Schmitt says.
MoCA has been Entropic's domain so far. The company founded the MoCA group and dominates market share in MoCA chips. The Verizon FiOS deployment represents about 70 percent of Entropic's revenues.
If the Broadcom theory holds true, how could Entropic catch up? Mobley speculates the company could buy up a PON-chip vendor, probably BroadLight Inc. or Teknovus Inc. . Neither one would come cheap, he adds (and Teknovus doesn't do GPON).
There's an extra wrinkle: Verizon's FiOS deployment slowed down last quarter. The company reported on Monday that during the second quarter, it reached 1.4 million subscribers for the service -- but its net subscriber gain was 23 percent less than in the previous quarter, Mobley notes.
Mobley doesn't think this will affect Entropic's earnings, due to be reported Aug. 5. But it could wreck the company's forecast for the following quarter.
— Craig Matsumoto, West Coast Editor, Light Reading