Why An Expensive Avago Technologies Is Still A Good Bet
- Avago Technologies trades at an expensive valuation after tremendous gains this year, but its premium valuation seems justified.
- Avago's earnings are expected to grow at an improved pace going forward, and its supplier relationship with Apple and Samsung should help it achieve the same.
- Avago's other end markets are also gaining traction, especially the fiber optics business.
- Avago Technologies net income from continuing operations increased to $428 million from $233 million reported in comparable period a year ago.
- The stock has rallied close to 70% since the beginning of 2014, backed by strong performance of previous quarters and is now up 122% over the last twelve months.
- The guidance from Avago for the Q4 FY14 has been revised and the company is expecting a 18-22% increase in revenue while the gross margin is expected to remain flat.
- Avago beat on both revenue and EPS with strength across the core segments.
- Wireless continues to deliver as demand from the Chinese OEMs offset the weakness in Samsung.
- Wired and enterprise showing steady growth. Free cash generation on track.
- RF component, optical fiber, and storage markets are expected to grow in coming years.
- Avago will capitalize on industry growth due its FBAR products, rising content per device, and IP strength.
- Acquisition of LSI is expected to bring cost and product synergies.
- Avago is priced cheaply on forward-earning basis, and thus it holds valuation growth potential. Buy ahead of earnings to capitalize on potential revenue beat and strong outlook.
Why Avago Technologies Stock Is A Good Investment Opportunity
- Avago's stock still has plenty of room to move up.
- Avago has compelling valuation metrics and very strong earnings growth prospects.
- Avago's stock is ranked first among all S&P 500 tech stocks, according to Portfolio123's "All-Stars: O'Neil" powerful ranking system.
Avago Definitely Getting Some Benefit Of The Doubt
- Buying LSI gives operations-focused Avago management a fat target for cost cuts and margin leverage.
- Wireless remains a good growth opportunity and LSI does add some complementary assets in networking.
- Significant margin synergies and improvements already seem to be in the price of Avago shares, making it more difficult to see the undervaluation argument today.
Avago Technologies: Bullish In The Wake Of Its Recent Dividend Increase
- On Thursday, June 5, Avago Technologies announced it would be increasing its quarterly dividend by 7.4%.
- Avago's wireless segment helped boost the company's most recent earnings performance which beat estimates by $0.08/share.
- The company's net income, cash on hand, and its upcoming dividend distributions could demonstrate significant long-term growth especially if its presence in both Europe and Asia remains steady.
- Avago's acquisition of LSI Corporation gives it exposure to enterprise storage and connects it with tech giants such as Intel and Cisco.
- Wireless communications make up 48.4% of Avago's revenue, which is important with the growth of smartphones across the world.
- The company has very little debt and its financial ratios put it above its competitors.
Yesterday, 11:31 AM
- Three weeks after providing a calendar Q3 warning that triggered a massive chip stock rout, Microchip (MCHP +7.3%) has provided Q4 guidance that's in-line with lowered estimates. The microcontroller vendor, which has often seen trends emerge ahead of peers, also said it saw most of its inventory correction in Q3, and expects Q4 sales to be just "slightly below typical seasonal levels."
- Chip stocks are up strongly (SOXX +4%) on a day the Nasdaq is up 1.4%. Since Microchip's warning, a slew of analog chipmakers and microcontroller firms (e.g. Atmel, Freescale, STMicro, Intersil, Linear) have offered light Q4 guidance, and other firms have reported seeing high-end Android weakness (e.g. Synaptics, Cirrus Logic, Amkor).
- On the other hand, several mobile chipmakers (Skyworks, RF Micro, TriQuint, Silicon Motion), some of which have decent iPhone exposure, have provided strong results and/or guidance. Other chipmakers, such as Broadcom, Texas Instruments, and Xilinx, have rallied after delivering in-line guidance.
- Susquehanna's Chris Caso: "By now, we think it’s clear that the weakness MCHP saw in September is not company specific ... The question now is if the full extent of the weakness has been dialed into estimates. If it has, then this would be among the shortest and mildest downturns in many years."
- Notable gainers: SNDK +3.9%. MU +4.1%. AMAT +3.9%. TXN +4.7%. NXPI +3.9%. NVDA +3.5%. MXIM +4.7%. LLTC +5.1%. FCS +9.6%. FSL +8.8%. ADI +6.5%. TQNT +6.8%. RFMD +6.5%. ATML +5.9%. AVGO +5.1%. MRVL +4.7%. AMCC +8.9%. BRCM +3.6%. TSM +4.4%. ARMH +3.3%.
- Intel (INTC +3.5%) has recovered most of the losses it saw yesterday due to Intesil's (ISIL +3.3%) results and guidance, and related comments about a PC chip inventory correction.
- Chip ETFs: SMH, XSD, PSI, SOXL, USD, SOXS, SSG
Mon, Oct. 20, 5:21 PM
- iPhone suppliers are trading higher after Apple beat FQ4 estimates and issued FQ1 guidance that was mostly above consensus. FQ4 iPhone sales of 39.3M were better than expected, and iPad sales of 12.3M worse than expected.
- Cirrus Logic (NASDAQ:CRUS) +1.4% AH. Avago (NASDAQ:AVGO) +1.2%. Skyworks (NASDAQ:SWKS) +1.2%. RF Micro (NASDAQ:RFMD) +2.4%. NXP (NASDAQ:NXPI) +2%.
Thu, Oct. 16, 2:47 PM
Tue, Oct. 14, 9:33 AM
- Skyworks (NASDAQ:SWKS) expects FQ4 (Sep. quarter) revenue of $718M and EPS of $1.08, above a consensus of $679.5M and $1.01. Full FQ4 results arrive on Nov. 6.
- The RF component maker also hiked its FQ3 guidance in June. Strong iPhone 6-related demand may have contributed to the latest hike, given recent reports.
- Peers are also up strongly amid a higher open for equities: RFMD +5.5%. TQNT +5.3%. AVGO +3%. Like other chip stocks, the group sold off on Friday following Microchip's warning.
Tue, Oct. 14, 9:15 AM
Fri, Oct. 10, 9:59 AM
- Microchip's (MCHP -12.5%) calendar Q3 warning, which was accompanied by a declaration that it believes "another industry correction has begun and that this correction will be seen more broadly across the industry in the near future," is taking a heavy toll on chip stocks (SOXX -5.5%).
- Intel (INTC -4.2%) and many other chipmakers have joined the several firms that sold off AH yesterday in going in the same direction as Microchip: MU -5.8%. FSL -8.5%. BRCM -3.6%. SWKS -7.5%. RFMD -6.2%. XLNX -4.9%. MXIM -5%. AMBA -5.5%. IDTI -6.7%. CAVM -7.4%. AVGO -10.2%. SMTC -4.3%. SYNA -4.1%. POWI -6.9%.
- Chip equipment makers are also getting hit: AMAT -3.5%. KLAC -3.3%. LRCX -2.3%. UTEK -2.5%. KLIC -2%.
- As Microchip noted in yesterday's warning, the company's very diversified customer base, together with its recognition of distributor revenue on a customer sell-through basis rather than a distributor sell-in basis, often allow it to see industry changes before peers.
- The microcontroller vendor added its warning was driven by a September decline in sales to Chinese clients, and observed it has typically "returned to sequential revenue growth after two quarters" during past downturns.
- Chip stocks have had a good run over the last 12 months, aided by healthy mobile demand and the industry's consolidation wave.
Fri, Sep. 19, 9:36 AM
- iFixit's teardown of the iPhone 6 Plus turned up five Qualcomm (NASDAQ:QCOM) chips, up from the three found in last year's teardown of the 5S and nearly matching the six found in certain Galaxy S5 teardowns.
- In addition to the expected Cat-4 LTE baseband modem, a Qualcomm power management IC, RF transceiver, receive-only chip (needed to enable LTE carrier aggregation), and envelope-tracking IC (relatively new, improves battery life) were found in the 6 Plus.
- In-line with rumors and the company's hints, an InvenSense (NYSE:INVN) motion sensor - specifically, a 6-axis gyroscope/accelerometer - was found. That suggests InvenSense has displaced STMicroelectronics (NYSE:STM) as the iPhone's motion sensor supplier.
- Two Skyworks (NASDAQ:SWKS) power amplifier modules are found, including a low-band LTE part. Avago (NASDAQ:AVGO) has both a high-band amplifier module, and an integrated ultra high-band amplifier/FBAR filter module. TriQuint (NASDAQ:TQNT) can claim a 3G amplifier module, and merger partner RF Micro (NASDAQ:RFMD) an antenna switch module.
- Broadcom (NASDAQ:BRCM) appears to remain the iPhone's combo chip supplier (courtesy of a module from partner Murata), and also supplies a touch controller IC. Chipworks thinks Broadcom also has the Wi-Fi slot for the Apple Watch.
- As expected, NXP (NASDAQ:NXPI) is supplying an NFC module and the M8 motion co-processsor, and Cirrus Logic (NASDAQ:CRUS) the audio codec IC. Texas Instruments (NASDAQ:TXN) is providing a touch transmitter IC.
- Moving in response: INVN +1.9%. AVGO +1.5%. STM -3.9%.
Thu, Sep. 4, 9:07 AM
Fri, Aug. 29, 11:03 AM
- Avago (AVGO +8.1%) has received a slew of target hikes after beating FQ3 estimates, reporting strong margins, and issuing healthy FQ4 guidance. RF component peers Skyworks (SWKS +1.6%), RF Micro (RFMD +4.5%), and TriQuint (TQNT +5.2%) are also higher.
- "We believe Street continues to under-appreciate this self-help story where mgmt has a proven record of cutting costs, paying down debt, and executing on multiple secular growth cycles," says BofA/Merrill. Its FY14 and FY15 EPS forecasts have respectively been raised by 20% and 25%.
- Credit Suisse: "Avago's leverage to structural growth drivers including content increases in the Industrials/autos end-mkts and accelerating demand for bandwidth, as well as, product cycles (4G/LTE wireless ramps at Apple and China) should allow the company to outperform peers." The diversification provided by the LSI deal is seen providing "further stability."
- Morgan Stanley expresses "high conviction in management's ability to execute on driving LSI's [operating margin] from 17% to 30% over the next few years," given Avago has doubled its op. margin to 30% since its 2005 LBO.
- On the CC (transcript), CEO Hock Tan mentioned wireless sales are expected to rise over 60% Q/Q thanks to "the ramp of a new phone model and a North American smartphone customer" (a clear iPhone 6 reference). Demand for FBAR filters and related products in 4G phones remains strong.
- Wired infrastructure is expected to grow at a low-single digit rate (switch/router ASIC growth offsetting flat optical component demand), and enterprise storage is expected to see mid-single digit growth excluding the PLX acquisition.
Fri, Aug. 29, 9:07 AM
Thu, Aug. 28, 5:00 PM
- Though Avago's (NASDAQ:AVGO) revenue from continuing ops of $1.29B was below consensus, the figure excludes sales from its flash storage product unit (to be sold to Seagate) and its Axxia network processor unit (to be sold to Intel). With flash/Axxia included, revenue was $1.39B, above a $1.35B consensus.
- FQ4 guidance, which excludes flash/Axxia but includes just-acquired PLX Technology, is for revenue from continuing ops to be up 18%-22% Q/Q. The consensus is at $1.42B.
- FQ3 gross margin for continuing ops was 57%, up from 54% in FQ2 and 51% a year ago. Opex was 23.9% of revenue vs. 21.2% a year ago. GM is expected to be at 56% (+/- 1%) in FQ4, and opex is expected to be flat Q/Q at $307M.
- Thanks to LSI's products, enterprise storage made up 32% of revenue. Wireless was 28%, wired infrastructure 27%, and industrial 13%. Strong 4G RF component demand helped wireless sales rise 26% Y/Y.
- FQ3 results, PR
Thu, Aug. 28, 4:05 PM| 3 Comments
Wed, Aug. 27, 5:35 PM
Wed, Aug. 13, 6:10 PM
- Intel (NASDAQ:INTC) is buying Avago's (NASDAQ:AVGO) Axxia network processor unit for $650M in cash. The deal is expected to close in Q4.
- The unit was obtained by Avago through the LSI merger. It had 2013 revenue of $113M, and employs 650 people.
- The acquisition broadens Intel's product line within a competitive network processor market that also features Broadcom, Marvell, Cavium, and Freescale, among others.
- The chip giant bought Ethernet switch processor startup Fulcrum Microsystems in 2011, and (thanks to the Fulcrum deal) counts data center switch vendor Arista Networks among its clients. The adoption of software-defined networking (SDN - shifts network intelligence to software-based controllers) is expected to boost demand for off-the-shelf silicon relative to proprietary ASICs.
- Notably, the Axxia line relies on ARM and IBM PowerPC CPU cores rather than x86 cores. However, the processors are often used in PCIe cards within servers running Intel x86 CPUs.
- Back in May, Avago agreed to sell LSI's flash product unit to Seagate for $450M.
Fri, Jul. 18, 2:51 PM
- "We believe Skyworks’ (SWKS +13.5%) diverse analog portfolio is enabling content share gains in its handset customer base," writes Canaccord after taking in the RF component giant's FQ3 beat and very strong FQ4 guidance.
- Canaccord thinks the FQ4 outlook is due to a mixture of strong iPhone 6 content share, growing sales of higher dollar-content integrated solutions to Chinese/emerging markets OEMs (gaining Android share), and "growing traction" for the company's non-phone analog IC business.
- 802.11ac Wi-Fi, mobile infrastructure, and embedded products (the proverbial "Internet of Things") are some of the non-mobile RF markets Canaccord sees Skyworks growing its sales to. Needham, for its part, also sees the smart grid, automotive, and medical markets providing a boost.
- On the CC (transcript), CEO David Aldrich declared broader mobile RF demand is benefiting from the need to support a larger number of spectrum bands - Avago (AVGO +4.3%) also benefits from this - as well as growing system complexity (driving a shift towards integrated solutions) and OEM efforts to improve signal performance.
- RF component peers Avago, RF Micro (RFMD +6.7%), TriQuint (TQNT +6.8%), and Resonant (RESN +7%) are outperforming amid a tech rally, as are several other mobile suppliers. INVN +3.9%. HIMX +2.9%. OLED +5.3%. CRUS +2.9%.
Wed, Jun. 25, 6:22 PM
- Black Sand Technologies, based out of Austin, was founded in '05 and has raised $28.2M in funding over its history.
- Notably, the product page on Black Sand's site only shows 3G amplifiers, and the most recent PR on its news page is from 2012. All signs suggest Qualcomm (QCOM) is buying the company to strengthen its power amplifier IP and/or engineering talent, as it encroaches on the turf of established vendors such as Skyworks (SWKS), TriQuint (TQNT), RF Micro (RFMD), and Avago (AVGO) with system-level solutions.
- Qualcomm, estimated to have 64% of the 2013 baseband processor market, made a dramatic entry into the amplifier market last year by announcing an RF front end solution (amplifiers included) that promised superior 3G/4G multi-band support and (via technologies such as envelope tracking) power efficiency. Skyworks, TriQuint, and RF Micro all tumbled following the announcement.
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