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Avago Technologies: This Chipmaker Can Add Value to Your Portfolio

May 23, 2014 | About:
rusticnomad

rusticnomad

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Avago Technologies (AVGO) has made a good comeback. The company, despite seeing weakness all through the year, posted fantastic results. The company’s good results make it a promising investment. The operational efficiencies led Avago to see a good 20% growth in its top line. But looking at the ratios, the company is still expensive with a trailing P/E of 29. Also, the decline in the dividend yield to 1.70% might scare a few investors away.

Moreover, the stock is trading close to its 52-week high. Avago, being associated with some of the top companies such as Apple and Samsung, is confident about a solid performance in the future. With the growing mobile segment and Avago being a solid player in it, it has bright opportunities to hit gold in the future.

Avago’s wireless communication business should prove to be a primary growth driver for the company. So, with the growing traction of Apple’s iPhone, Avago is expecting to benefit. Also, in the past, despite weakness in Apple's iPhone production, Avago has managed to increase its wireless revenue. Avago sees bright opportunities in association with Apple and Samsung.

The Road Forward

With increasing demand for Samsung’s Galaxy 5, Avago is confident going forward. Moreover, Apple is in the course of introducing bigger iPhones later this year, which will benefit Avago in the long run. The company is expecting great traction from the iPhone as it has gained content in the device.

Moving on, with the booming market and increasing traction, Avago is expected to see tailwinds in the future as Apple launches its bigger iPhone. Rumors going around on the web suggest that the next iPhone’s screen will be 4.7 inches or larger as the company tries to woo Android users into its ecosystem. In addition, since Avago also supplies content for the iPad, it could see more Apple goodness later this year with the new iPad cycle.

LTE to Drive Growth

In addition to this, Avago is focusing on various aspects to improve its profitability. To fetch more profit and to diversify the risk, Avago has come up with a strong diversification strategy. Under this, it is focusing on landing few design wins in China. With the introduction of the LTE platform, China is seeing a growing demand for LTE-enabled smartphones. On the other hand, management of Avago is pleased with such a scene and is confident of winning meaningful content in smartphones in China.

With the growing demand for LTE smartphones, Avago has significant opportunity since 4G Smartphone shipments in China are expected to rise to 72.6 million this year from 4.6 million units last year. It is expected that by 2017, there will be 300 million 4G handsets in the Middle Kingdom. So, Avago has made a smart move by targeting this market.

A Look at Wired Infrastructure

Moving on to Avago’s wired infrastructure business, the company is expecting a lot from it as in the past, it grew by an impressive 60%. Avago is also counting on Cisco, which is one of its 10%-plus customers. The proliferation of connectivity around the globe with different applications in the Internet of Things and the Industrial Internet will lead to demand for data center equipment and faster connectivity equipment going forward.

Product Moves and Conclusion

Avago is also working on bringing in new products out of its pipeline. Its two new launches namely MicroPOD and MiniPOD in association with Corning are expected to take it to new highs with exciting features. It allows datacenters and enterprise networks to switch from 10G to 100G Ethernet. This new suite of products also increases the link distance to 550 meters, thereby increasing the efficiency of data centers.

Avago has appreciated strongly this year and the stock isn’t as cheap as it was in December last year. The company has many catalysts which make it a solid performer and chances for a better performance are concrete. Avago seems a good pick as of now.


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