Apple's (NASDAQ: AAPL ) new iPhones have given chipmaker Avago Technologies (NASDAQ: AVGO ) a new lease on life. Avago was struggling earlier this year as the iPhone 5 neared the end of its cycle, but the ramp up in production of the iPhone 5s and 5c has given the company a shot in the arm.
Teardowns of the new iPhones have revealed that Avago has probably gained spots new devices, setting the stage for a strong finish to the year. That's why, when the company reports fiscal fourth-quarter results early next month, investors can expect a strong performance.
In fact, Avago had guided for strong results, issuing revenue guidance of $721 million-$740.5 million, well ahead of the $696.3 million consensus estimate. It won't be surprising if it guides ahead of the Street again next month, as the iPhone has been in strong demand -- and the company has other things going for it as well.
Demand for iDevices could give Avago a boost
There have been conflicting reports regarding iPhone demand. Reports suggest that Apple is cutting orders for the cheaper iPhone 5c, but at the same time, it is expected to ramp up production of the iPhone 5s. According to DIGITIMES, Apple has reduced iPhone 5c orders by 50% at Pegatron. Pegatron has manufactured 70% of the iPhone 5c units, and it has been rumored that Apple may be considering shifting production.
The drop in orders is possibly because the 5c isn't selling as well as the 5s. It has also been reported that Foxconn might end production of the 5c to produce more units of the flagship 5s. Also, despite being on sale for nearly two months, consumers still have to wait several days before they actually receive their 5s units, indicating strong demand for the device.
Earlier this month, The Wall Street Journal reported that Apple is tapping more manufacturers to build iPhones and iPads going into the holiday season. This is good news for Avago, as it supplies the power amplifier components inside the iPad Air as well. Apple CEO Tim Cook expects that the company will sell a lot of iPads this holiday season. In fact, consumers are four times more likely to buy an iPad than any other tablet. As such, Avago investors can expect to see better revenue guidance.
Samsung: Another tailwind
The good times will likely continue for Avago as its other important customer, Samsung (NASDAQOTH: SSNLF ) , is also said to be ramping up production of its next flagship device. Samsung is expected to release the Galaxy S5 next March, with an announcement expected to be made in mid-January. The company is rumored to be putting a superior display in the next Galaxy in a bid to outdo Apple.
On the last conference call, Avago CEO Hock Tan explained that "our two largest smartphone customers are ramping [up] their next-generation platforms, and our content in both these platforms continues to improve substantially." Hence, the competition between the two smartphone rivals is good for Avago, and Samsung's S5 production ramp is another reason for a sunny outlook.
Apart from these smartphone behemoths, Avago is also positioned to benefit from an increase in data center spending, leading to higher demand for its optical products. In addition, development of telecom and networking infrastructure in China has proven to be a tailwind for Avago's core routing business. In the industrial market, Avago is seeing better order rates.
Chipmakers have reported lean inventory levels, signaling buildup of end-market demand. The industrial semiconductor market has been improving, according to IHS, and this could be another tailwind for the company going forward.
The bottom line
There is a strong possibility that Avago will, once again, issue strong guidance when it reports earnings on Dec. 4. A low forward P/E of just 13 times and a decent dividend yield of 2.10% make Avago more interesting. The company is slated to benefit from different customers, and it won't be surprising if the stock continues to appreciate in the future.
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