Wireless chip maker Avago Technologies (AVGO, Financial) recently reported exciting results for the third quarter 2014 that topped the analysts' expectations on both the top as well as bottom lines. Its results were mainly driven by strong demand for its radio frequency chips that are exploited in the smartphones, but the future looks better.
Impressive times ahead
Avago is committed to reshaping its business going forward and is strategically integrating products and services of LSI Corporation (LSI, Financial) and PLX Technology (PLX, Financial), which Avago acquired during the third quarter. These acquisitions will certainly strengthen its product portfolio in both the wired device markets and the end market. Avago expects these acquisitions to contribute more than 10% in the revenue for its end market sequentially for the current quarter.
LSI’s hard drives, servers and storage connectivity product lines should empower its product line and help the company effectively serve its customers worldwide. Moreover, the company is seeing strong traction in the enterprise storage market as the demand for hard disk drives is growing. Avago Technologies during the third quarter launched certain design wins for custom solid state drives controllers that should benefit the company in the long-run. Meanwhile the company is also observing positive demand for its PreAmp products, server storage connectivity business and in 3.5-inch desktop that should enhance its revenue for the fourth-quarter.
Its server and storage connectivity business should gain significantly from its newly released 12G SaaS business solutions that its server OEM customers are exploiting. Also, the company is observing significant traction for the LSI’s IP Licensing business in the industrial and smallest end market. IP licensing business contributes nearly 13% of the total revenue. Avago expects its industrial to grow at the mid-single digit in the fourth-quarter as it continues to see strength in its industrial re-sales in Asia and Japan.
In addition, the company also remains on track to divest non-core assets of Axxia Networking and Flash Memory Chips businesses. Avago plans to sell these businesses to Intel (INTC, Financial) and Seagate Technology (STX, Financial). This is a smart move by the company and it should help it generate more cash from these transactions. This will also help the company invest more money in the research and development of the growing division and expand its market reach. Also, Avago is determined to save approximately $200 million through its cost-cutting programs annually to 2015 that should certainly assist the company in reducing its total debt of $5.52 billion.
Furthermore, the company continues to benefit from the 4G rollout in China. It is experiencing high demand for its FBAR and FBAR-associated products in communication and wireless devices. Also it is seeing growing content from the Chinese LTE smartphones, resulting from the increased proliferation of wireless bands within LTE smartphones. Avago should also benefit from the ramp of new phone models and from North America smartphone customers. These positive aspects should certainly drive its revenue in the fourth quarter.
It also expects growth for its ASIC business from the continuing demand in its enterprise switching and routing that should increase its revenue in the fourth quarter. Meanwhile the company has recently rolled over 25G and 50G offerings in the high-speed service in IP that should certainly keep the company ahead of its peers. Also, Avago is committed to bringing many new design wins in the high performance computing platform and software-defined networking switches in the fourth-quarter that should drive its growth in the coming years.
Conclusion
Avago Technologies looks pretty good stock that has potential growth in the future. Also, the company is reshaping its business and making potential acquisitions such as LSI and PLX that should drive its growth in the long run. Avago currently trades at the trailing P/E of 70.65 and forward P/E of 12.64, which remains little expensive, but it has tremendous growth prospects.
Also, its PEG ratio for the next five years is estimated at 0.55 continues to support its growth. Therefore, investors can consider the stock has promising returns in the long run. Besides, analysts have estimated CAGR of 31.43%, greater than average industry CAGR of 18.51% for the next five years that signifies remarkable growth potential in the future.
