Will Acquisitions Slow Avago's Growth?

Semiconductor maker Avago  (NASDAQ: AVGO  )  has grown revenue wildly over the last year, due largely to its successful position in wireless communications and wired infrastructure. In addition, Avago made a big acquisition earlier this year, buying fellow chip maker LSI for $6.6 billion, and it is also preparing for a second, smaller acquisition . These deals will strengthen Avago's technology portfolio and give the company stability. But, will they also slow the rapid growth that Avago has experienced?

A big year
Revenue at Avago has grown between 19%-25% year over year for each of the last three quarters. This growth has been driven by the ongoing LTE rollout in China, as well as key accounts with wireless handset giants Samsung and Apple  (NASDAQ: AAPL  ) . In the most recent quarter, the wireless and wired segments grew a staggering 25% and 43%, respectively, and now account for over 80% of Avago's income.

AVGO Chart

Avago stock price and revenue growth. Source: YCharts.

This growth looks likely to continue throughout the year for several reasons. First, Avago's FBAR filter technology has gotten a huge boost in demand from the spread of LTE phones, as it allows these phones to rely on a greater number of frequency bands. Second, the LTE rollout is still in the early stages in China, and it is beginning to take off in the rest of the world as well, which will drive both wireless and wired demand. Finally, Apple's expected release of the iPhone 6 later in the year will also contribute to demand for Avago's wireless products.

The acquisitions
Last December, Avago announced that it would buy LSI, a provider of storage and networking controllers, for $6.6 billion in cash, a deal that closed this May. Avago immediately divested part of this acquisition, selling LSI's flash controller business to storage provider Seagate  (NASDAQ: STX  ) for $450 million in cash, since this segment did not fit in with Avago's long-term strategy, according to management. The rest of the LSI business is expected to strengthen Avago's position in the wired infrastructure market, as well as give it a leadership position in the storage controller market.

Avago also recently announced that it intends to buy PLX Technology for approximately $300 million in cash. This deal, which is expected to close in Avago's fiscal fourth quarter, should further strengthen the company's storage and networking portfolio.

The expected growth
As a result of the LSI acquisition, Avago's revenue in the third quarter is expected to be between $1.32 billion-$1.4 billion, almost double the revenue from the same quarter last year. Looking down the line, the LSI products should effectively help balance out Avago's high-growth, potentially volatile wireless business. Avago's CEO, Hock Tan, confirmed as much, stating that the company is now composed of two fast-growing segments, wireless and wired infrastructure, and two stable segments, storage and industrial.

Over the next 12 months, the wireless and wired segments are expected to continue to grow quickly. According to management, storage and industrial will probably grow in the low-to-mid single digits, and the entire company should see growth in the high single digits, or low double digits.

What this means for investors
Following the beginning of revenue expansion last year, Avago's stock price has almost doubled. It seems inevitable that some of the share-price growth was not just a rational response to Avago's improved performance, but was due in part to investors' excitement over a hot and rapidly expanding company.

Avago remains a good company, and in fact, the large LSI acquisition made it more diversified and more stable. However, it is not clear whether the current high price can continue to increase, or even hold once the more modest growth rates become apparent to the investing public. With its combination of stable and growing business segments, Avago will probably make for a good long-term investment, but it might make sense to wait until the excitement over its recent growth abates.

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