Tech Titans Will Drive Outperformance For This Key Smartphone Supplier

This 43%-gainer hasn't run out of steam yet.

Jul 22, 2014 at 2:00PM

Avago Technologies (NASDAQ:AVGO) is on a tear in 2014, having gained close to 43% so far. The chip maker's business is being driven by smartphone giants Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF), to whom it supplies radio frequency chips. In fact, according to UBS Investment Research, Apple and Samsung are expected to account for 60%-65% of Avago's revenue this year. 

Samsung's latest flagship smartphone is selling at a robust pace, and there is positive chatter around Apple's iPhone refresh. As such, Avago's prospects look strong. Moreover, growth in the Chinese LTE handset market adds to the company's smartphone opportunity. In short, Avago's performance should continue improving due to two simple reasons -- Apple and Samsung.

Apple's "big" move
Avago is expected to derive a big chunk of its revenue from the two smartphone titans. In the previous fiscal year, it generated around 20% of its revenue from Apple contractor Foxconn. Avago is a key Apple supplier, as its RF chips can be found in both the iPhone and the iPad. The last two iPhone generations have Avago chips in them, and it reportedly gained dollar content in the iPhone 5s.

The company looks set to land the lucrative Apple spot in the rumored iPhone 6 as well. On the previous conference call, Avago CEO Hock Tan said that the company expects "the beginning of a ramp from our North American smartphone customer as they transition to their next-generation platform." 

Without much doubt, it can be concluded that Avago is talking about Apple, which is expected to bring out a revolutionary smartphone this time. As reported on AppleInsider, Apple is expected to launch the next iPhone in late-September, so it must have started the production ramp by now. Cupertino is expected to upgrade the iPhone's screen to 4.7 inches this time. Additionally, a 5.5-inch phablet also seems to be in the cards. 

Considering how accurate Apple supply chain rumors have become over the past couple of years, it won't be surprising if Apple actually launches the two devices in flesh. If it does so, Avago's addressable market should receive a bump as a bigger iPhone will allow it to tap the phablet market. Last year, 20 million phablets were shipped, and 120 million of them are expected to be shipped in 2018. 

Samsung has been the leader in phablets so far, and Apple will try to challenge its dominance with a bigger device of its own.

Samsung on a roll
On the other hand, Samsung itself is delivering solid smartphone growth. Sales of the Galaxy S5 were better than its predecessor in the first month by 10%. The device has helped Samsung capture the No. 1 spot in the U.S. smartphone market. Avago had supplied three chips for the Galaxy S5, including power amplifier modules and FBAR filters. 

Additionally, Samsung is the leading smartphone seller in China, where LTE phones are gaining momentum. According to Goldman Sachs, 142 million LTE smartphones are expected to be sold in China this year, followed by 235 million units next year. Avago management is counting on this opportunity to power up its smartphone sales. It supplies chips to the leading smartphone player in China, Samsung, and this will allow it to make the most of this market.

Samsung recently unveiled the Galaxy Core Mini 4G, exclusively for China Mobile. This is an entry-level handset that's expected to spur adoption of LTE in the Middle Kingdom. However, on a closer look, it becomes clear that Samsung has crammed it with decent specs such as 1.5GB of RAM, Android 4.4 out of the box, and the ability to record 720p videos. 

Samsung is following the right strategy with this device, as low-cost phones with higher-end specs are in solid demand in China. As such, Avago can ride its coattails to tap the Chinese LTE market.

The bottom line
Avago is slated to benefit from three major catalysts in the smartphone market -- Apple, Samsung, and China. Additionally, the company also pays a dividend yielding 1.60%. As such, Avago looks like an enticing pick for the long run.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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