Avago Technologies (AVGO, Financial) reported solid numbers for the recent quarter with significant growth in both revenue and profits on a year over year basis. The result also topped the analysts’ consensus and was mainly driven by increased demand for Apple (AAPL, Financial) iPhones, which is a major customer of Avago. Led by its strong performance the stock is currently at its all time highs. Let’s see in detail whether the company will be able to maintain this momentum in the future as well.
Strong growth
For the quarter its revenue rose 115% to $1.59 billion year over year while adjusted earnings came at $1.99 a share compared to $1.26 last year . These are encouraging numbers reflecting the strength in its business and the potential it has to carry this growth forward. This is a result of Avago’s focus on its core business. With this in mind, the company divested two of its noncore units during the quarter namely the LSI flash and Axxia business. This divestment allowed the company to invest more in its core units, which will reap positive results in the future.
The company primarily operates in four segments, Wireless Communications, Wired Infrastructure, Enterprise Storage, and Industrial & Other segments, all of which reported good growth, with wireless business being the strongest. Its main highlight during the quarter was increased demand from iPhones; in fact it will not be wrong to say that Avago in turn is a prominent indicator for Apple. Apart from its strong presence in the U.S., Apple is rapidly growing its presence in China, which in turn is upgrading to the 4G network. This is important for Avago as it is a major supplier of parts, needed for China’s 4G upgrade. It will definitely boost its top line in the days to come.
Risks and beyond
However, there are fears that in the future Smartphone makers such as Apple and their likes could design these chips internally, which if true is a serious matter of concern for the entire semiconductor industry. In fact, in its recent launch of Galaxy S6, Samsung (SSNLF, Financial) has used its own application processor chip, which was earlier outsourced to Qualcomm (QCOM, Financial). Avago must be prepared with a strategy to face this situation as it might not be far when Apple also comes up with its own chips.
Apart from wireless, the company is also strengthening its market share in Enterprise Storage and Wired Infrastructure business. The acquisition of LSI is an important driving factor for Avago in this direction. The deal will not only make it a leader in the Enterprise Storage market but also expand its product offerings and bring system-level expertise in its wired infrastructure market. It will also help the company to achieve annual cost saving at a rate of $200 million by the end of this new fiscal year . In a recent press release the management cites that it is more than half way through with this integration and is confident to achieve its target by the year end.
In addition, Avago also acquired PLX Technology Inc (PLXT, Financial), which is a leading semiconductor device supplier to the enterprise storage, wired, wireless and industrial end markets. The deal finalized for a sum of $309 million will enable Avago to leverage PLX’s expertise of past 20 years in the design and development of integrated circuits and further bolster its business. In fact, both these acquisitions have set the company on a growth trajectory that would yield astounding results in the future.
Conclusion
With a trailing P/E of 103.61 compared to the industry P/E of 120.55, Avago seems to be on the right track. But the most interesting part is, it has a forward P/E of 13.23, which clearly reflect the growth in its earnings. Moreover, the stock has been a strong performer in the past years and considering its future prospects it could continue this momentum in the days ahead.
