Avago Technologies: Expect More Upside

Avago Technologies (AVGO) recently announced third quarter revenue of $1.7 billion, up 36% year-over-year. Going forward, Avago has also provided fourth-quarter revenue guidance and estimates revenue to be in the $1.825 billion to $1.875 billion range.

In addition, Avago had declared third-quarter non-GAAP net income of $660 million, or $2.24 per diluted share, an increase of $313 million from $347 million or $1.26 per diluted share of net income in the third quarter of 2014. Thus, it is evident that Avago is delivering impressive growth, driven by its industrial, wired infrastructure, enterprise storage, and wireless markets.

The semiconductor major illustrated excellent year-over-year financial results mainly due to its well-diversified product offerings spread across a variety of markets including, domestic and enterprise which further minimizes the risks and provides sufficient cash streams to sustain the company’s key operations while delivering improved shareholder returns.

This acquisition will be a long-term catalyst

The acquisition of Broadcom has creating a leading and highly-diversified communications semiconductor company.
It widens Avago’s portfolio of group-leading franchises and provides several material growth opportunities. In addition, the transaction is believed to be immediately beneficial for generating significant free cash flows and in hugely expanding long-term shareholder value for both the companies. The consolidated enterprise value is expected to be approximately $77 billion, transforming Avago into the third largest semiconductor major, just after Intel Inc. and Qualcomm.

Importantly, the Board of Directors at Avago Technologies Limited recently announced an interim quarterly cash dividend of $0.42 per ordinary share payable on September 30, 2015 to the key stakeholders as of September 18, 2015 and in line with the company’s continued commitment to deliver improved shareholder returns.

The planned acquisition of Broadcom has significantly enhanced the already well-diversified products and services portfolio of Avago, delivering outstanding free cash flows and accelerated company growth.

Alex Gauna of JMP Securities has recently upgraded Avago to “Market Outperform” with a price target of $165 and primarily driven by the fact that the estimated strength in iPhone 6S and iPhone 7 would be the key growth drivers for Avago.

Further, Pacific Crest's semiconductor analyst McConnell reiterated an “incrementally more positive” rating on Avago with a price target of $180, given the company’s limited exposure to China and strong iPhone 6s sales.

A majority of the key investment analysts are extremely positive about the growth prospects of Avago Technologies with significant forecasted demand for iPhone 6S and iPhone 7, using semiconductor chips designed by Avago and hence, it must accelerate demand for these semiconductor chips.


Finally, Avago’s valuation also indicates that the stock could be a good holding for the long run. It has trailing and forward P/E ratios of 31.70 and 12.68, respectively. The forward P/E is lower than the industry’s average P/E of 17.42. The PEG ratio of 0.51 further indicates that Avago is undervalued, especially because the industry’s PEG ratio is 0.91.

Hence, considering all perspectives, Avago Technologies looks like a good buy for the long run, making it a good investment for the long run.
Published on Oct 1, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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