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Chipmaker Avago Technologies (NASDAQ: AVGO ) has successfully managed to turn its business around, and its recently released third-quarter results are proof. The company's business was in a state of flux earlier this year due to a product transition at its chief customer, but things have changed for the better.
Avago's revenue guidance of $721 million-$740.5 million for the current quarter is ahead of the $696.3 million consensus. This is not surprising as Avago is a key supplier to Apple (NASDAQ: AAPL ) .
A big opportunity
Last year, Avago supplied radio frequency chips for the iPhone 5, and Foxconn had accounted for 17% of Avago's overall revenue. With Apple's next edition of the iPhone expected to release in September, it is not surprising that Avago's guidance came in way ahead of what analysts were expecting. As Apple ramps up production of the handset, Avago will no doubt benefit.
Moreover, as we approach the iPhone launch date, the possibility of a cheaper "iPhone 5C" being in existence is getting stronger, and this should further help Avago by increasing its addressable market.
Apple needs to make its presence felt in emerging markets such as India and China, and a mid-range iPhone would help its cause. The smartphone behemoth has reportedly been in talks with China Mobile (NYSE: CHL ) and as the telecom carrier prepares to launch its 4G LTE network this year, the presence of a cheaper iPhone would help spur adoption.
According to China Daily, China Mobile is expected to allocate more than half of its $30.5 billion capital outlay this year toward its 4G rollout, and a deal with Apple will benefit both parties.
Ming-Chi Kuo of KGI Securities (via Business Insider) believes that China Mobile and Apple's cheaper iPhone together will enhance penetration of LTE in the country. Morgan Stanley analyst Katy Huberty is of the opinion that Apple would gain six points in market share in China with a cheaper iPhone.
All these possible developments bode well for Avago as it will be able to sell more of its chips if it manages to find a place inside the budget iPhone. In addition, Avago also counts Samsung as a customer, and it stated over the previous conference call that the Korean giant is ramping up production of its next-generation platform.
The wireless market accounts for 45% of Avago's overall revenue, and with clients such as Apple and Samsung, robust growth can be expected in this segment.
In the wired infrastructure market, which contributed 31% of Avago's revenue in the previous quarter and grew 17% from the year-ago period, the prospects look good. Avago is finally seeing demand from enterprise customers pick up. Increased data-center spending pushed up demand for its 10G and 40G optical products.
Avago is expecting the momentum in data-center spending to continue, while also expecting an upswing in its core routing business on the back of infrastructure buildouts in China. As a result of these developments, the wired infrastructure business is expected to grow 20% sequentially.
Finally, in the industrial market, Avago saw 18% sequential growth and better order rates from customers. This is a trend seen across various semiconductor companies. According to an IHS report, the industrial semiconductor market is steadily improving, and chipmakers are reporting lean inventories due to robust demand from customers.
The bottom line
Strength in the mobile market and gradual improvements in infrastructure and industry are some good reasons why Avago can continue to improve. A decent dividend yield of 2.30% at a conservative payout ratio of 31%, negligible debt, and a diversified business further strengthen Avago's case for the long run.
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