AVGO: FBAR Filters With a Long Future (BUY: $43 Target)

The deployment of LTE/4G is only the first of many changes in wireless technology that we expect to raise demand for Avago’s FBAR filters in coming years. Already, we are seeing Avago benefit from its success in iPhones and from growing traction at Samsung. Coverage this week of Samsung’s progress in developing 5G technology, while a headline grabber, primarily indicates that 4G/LTE technology will be filling phones for many years to come.

Samsung’s 28GHz technology may very well change the game, but not until 2020 at the earliest, according to Samsung, and then only if it is able to solve the usual transmission limitations of millimeter band technology. The time this will take, if it does eventually succeed, may very well give Avago the time it needs to identify a new thin film capable of pushing FBAR to operate at that frequency. Academic research indicates that, currently, FBAR is limited to operating at frequencies up to ~15GHz, but this is much closer to the Samsung target than SAW’s limitation of 3 GHz.

For now, we continue to expect the BAW/FBAR market expansion to continue to outpace that of RF products more broadly–both from unit demand and relative price stability–and will be watching to see whether modifications to FBAR could position it to stay at the leading edge of filtering products in 4.5G and 5G deployments. Our estiamtes place RF TAM growth at 20-25% in each of 2013 and 2014, based on rising adoption of 4G/LTE and of smartphones rather than voice-only or feature phones.

BAW/FBAR Value in 4G/LTE smartphones:

Our discussions with technology sources and baseband providers clarify the value of BAW/FBAR filters, and those discussions point to growing demand for this technology as LTE bands become more common in handsets, as handsets combine greater regional capabilities, and as a greater variety of different types of radios are incorporated (WiFi, etc.). Some drivers:

• BAW/FBAR does a better job of filtering higher frequency radio signals (well known) and so is viewed as essential for implementation of specific LTE bands.
• BAW/FBAR filtering is necessary to support specific combinations of bands within a handset (e.g. 25 and 2) to block interference. Other bands may run close to the public safety spectrum and so BAW/FBAR filtering is necessary. Still others may be vulnerable to interference from still-active TV signals. It is the combination of radio signals that matters, so counterarguments attesting to the ability of SAW to handle almost any band may technically be correct, but will be irrelevant since most phones will be supporting multiple bands and so will require BAW/FBAR filtering.
• WiFi Issue: the industry is moving to the more advanced 802.11ac standard and this then requires implementation of 5GHz WiFi radios. While the 5GHz segment of the spectrum is farther from the LTE/3G/2G frequencies (and so reduces interference concerns), the 2.4GHz WiFi capability is not being dropped. Phones will have backwards compatibility in WiFi just as in voice/data. Some were concerned that the move to 5GHz WiFi would reduce the need for BAW/FBAR filtering, but the use of the 2.4GHz segment is still likely to remain at maximum capacity as data transfer demands rise.

Bottom line: BAW/FBAR filtering TAM likely to grow more rapidly than smartphone unit growth as phones grow more complex with implementation of 4G/LTE. AVGO and TQNT relatively well-positioned to prepare filters for LTE and susequent wireless standards.