Chipmaker Avago Technologies (AVGO 4.11%) looks set to finish 2013 on a strong note. Driven by business from Apple (AAPL 2.15%) and Samsung (NASDAQOTH: SSNLF), along with strong data center spending, Avago shares have gained 70% this year and are looking for more. The company's recently released fourth-quarter report was impressive with a strong outlook, while the news that Avago is looking to acquire LSI has added optimism about its business going forward.
Avago's management expects sustained strength in its two largest business segments -- wireless communications and wired infrastructure -- and this is a good enough reason to take a closer look at the company. What's more, the stock is relatively cheap at 24 times trailing twelve months' earnings when compared to the industry average of almost 30 times earnings. In addition, Avago carries a dividend yield of 2.2%.
Prospects looking bright
Avago guided for revenue between $708 million and $715 million, comfortably ahead of the mid-point consensus expectation of $703 million. There are some strong catalysts in motion and a look at the developments in its end markets will make the bullish thesis even stronger. All in all, Avago looks like a company that could be a good investment.
The wireless communications segment accounts for 47% of Avago's revenue. It grew 10% year over year in the previous quarter and this momentum is expected to continue into the ongoing quarter. In the words of Hock Tan, Avago's CEO:
We expect strong demand from our two major smartphone OEM customers to sustain and be only partially offset by the seasonal weakness at other OEMs.
Two important catalysts
As previously mentioned, Avago is receiving solid business from Apple and Samsung. In fact, it has been reported that Apple's latest iPhones (both the 5s and the 5c) carry more content from Avago than last year. Avago's management said the same on the latest conference call, citing third-party teardowns of the latest iPhone.
This is great news for Avago investors considering that demand for the flagship iPhone 5s is strong. Production of the iPhone 5s is going on at a fevered pace as Apple looks to satisfy holiday demand. The Wall Street Journal reports that Foxconn is producing 500,000 iPhones a day, its highest run rate ever.
Additionally, Avago retained its spot in the latest iPad. Fool contributor Adam Levine-Weinberg opines that Apple is positioned to sell a good number of iPads this Christmas. He cites robust demand for the iPad Air, which has clocked a faster adoption rate than its last iteration, as a strong indication that Apple could have an "iPad Christmas."
Once the euphoria around Apple's refreshed line of iDevices settles down, Avago investors can expect Samsung to jump into the fray. Samsung's next flagship smartphone is rumored to be launched in the first quarter of 2014. Samsung would be looking to reclaim top spot with its next flagship as the current Galaxy S4 has fallen behind the iPhone 5s and iPhone 5, according to uSwitch Tech's Mobile Tracker.
As such, the company is looking to bring a cutting-edge phone next time, and might even give it an aluminum case to put criticism about poor plastic build quality to rest. Hence, Avago should continue benefiting from both Apple and Samsung's smartphone efforts in the foreseeable future.
A strong infrastructure business
The wired infrastructure business also seems to have hit a sweet spot. The segment grew a massive 55% year over year and accounts for a third of total revenue. Avago's fiber optics products are in good demand as data-center related spending is strong. Data-center spending is expected to remain strong in the ongoing quarter as well. However, a seasonal pause in carrier routing spending in China in the current quarter will weigh on the segment.
But, Avago is looking to convert its low-margin component sales to high-margin ones in the meantime and this should have a positive effect on the margins. Also, the $6.6 billion acquisition of LSI should help Avago expand into the enterprise storage market, while also bolstering its presence in wired infrastructure.
Final words
All in all, Avago looks well-positioned to benefit from flagship smartphones and infrastructure spending, which together account for 80% of its business. As mentioned earlier, the stock isn't too expensive and also pays a good dividend. Also, the company is growing at a good pace. Year-over-year revenue growth in the previous quarter was almost 20%, and if Avago manages to attain the mid-point of its current quarter's guidance, it would be reporting 23% year-over-year growth next reporting.
Hence, Avago looks like a good buy despite its solid run this year and the prospects in its end markets further suggest that investors can expect more gains in the future.
