Credit: A vago Technologies has been one of the hottest stocks in tech this year, thanks in no small part to the chipmaker's ties with the world's top-valued company, Apple.
NowAvago 's ( AVGO ) ties toApple ( AAPL ) will strengthen when the former takes over chip companyBroadcom ( BRCM ). In a deal valued at $37 billion, the new entity will take the Broadcom name, and Avago Chief Executive Hock Tan will head the combined firm.
The two complement each other as Apple contractors, supplying chips to different parts of Apple's iPhone and other smartphones -- Avago makes radio frequency chips and filters, and Broadcom produces controller and Wi-Fi combination chips. Set-top boxes and cars also use Broadcom chips.
Avago expects the Broadcom deal to close early in the first calendar quarter of 2016. Avago has already been working on integration plans to get a head start on day one.
"Avago has done a great job in integrating companies and cutting costs out of operations," analyst Thomas Diffely of D.A. Davidson told Investor's Business Daily.
Diffely said in the shorter term, Avago will benefit from hundreds of millions of dollars in cost savings from the Broadcom merger as it integrates the two operations.
"Over time, Avago will have a more integrated chip solution for the mobile consumer in particular," Diffely said.
HP Origins
Avago got its start in the 1960s as the semiconductor arm of Hewlett-Packard, nowHP Inc. ( HPQ ). It later became part ofAgilent Technologies ( A ) before private equity investors bought the business in 2005 and took it public in 2009.
Shares have climbed steadily since that IPO, which was priced at 15. Avago's shares now stand at roughly 149, after surging 90% in 2014 and another 47% this year.
Revenue also has been on a strong uphill run, more than quadrupling from $1.5 billion in 2009 to $6.9 billion in 2015. The 2015 number is up 60% from 2014.
In addition to being used in Apple's new iPhone 6s and other smartphones, Avago's chips are found in data networking, telecom equipment and industrial uses. The firm's two biggest business segments, in wireless and networking, have grown through a string of acquisitions in recent years.
Five Firms In Two Years
In the last two years alone, Avago acquired five companies, including data-center chipmaker LSI for $6.6 billion; PLX Technology, which makes integrated circuits; and most recently, the networking company Emulex.
As Broadcom merges with Avago, revenue in 2016 likely will grow another 8% to $7.39 billion, according to analysts polled by Thomson Reuters. But Avago still will trail No. 1 chipmakerIntel (INTC) and fellow chip company and Apple supplierQualcomm (QCOM).
Avago singled out one customer for contributing more than 20% of revenue in the fourth quarter: Foxconn, the Chinese electronics contract manufacturer that rolls out iPhones for Apple.
Slowdown Seen
But Avago's first quarter, which ends in January, is expected to see a seasonal slowdown in iPhones, a drop-off made more noticeable in the aftermath of the iPhone 6s launch and ramp-up. Avago expects wireless sales in the current first quarter to decline in the low-teens-percent range from the fourth quarter.
Still, analysts don't seem worried for Avago's future.
"Even if units are flat, Apple is still increasing content," Diffely said.
Other handset makers trying to close the gap with Apple, such as Samsung and China's Huawei, will need advanced technology, he adds.
"Bottom line, the need for advanced chips for these phones continues to rise," Diffely said.
Morgan Stanley analyst Craig Hettenbach expects a sharp acceleration in Avago's wireless business during the second half of 2016, aided by new capacity to handle new wafer sizes and higher dollar value content in premium filters due to rising LTE penetration and new wireless bands. (LTE is a high-speed wireless standard.)
"Now that the quarter is out of the way and, importantly, numbers are intact, we see Avago handily outperforming into 2016," Hettenbach said in a note to clients following the fourth-quarter report.
Enterprise Storage Boom
Meanwhile, Avago's enterprise storage business has been performing "rather amazingly," Avago CEO Tan said in the fourth-quarter conference call in early December. Revenue in that October-ending quarter was up 9% from the third quarter, despite soft demand.
Enterprise storage accounted for 35% of total revenue in the quarter. That was nearly as much generated by the firm's biggest division, wireless communications, which made up 37% of the total and was up 10% from the previous quarter.
Avago expects its enterprise storage business to maintain its momentum in the first quarter, with revenue still growing slightly from the fourth quarter, Tan said on the call.
"We also believe we may be gaining share in this segment," he added.
Hettenbach noted that product enhancements via acquisitions of LSI, PLX Technology and Emulex likely helped Avago's enterprise storage business.
The company's much smaller wired infrastructure business showed 2% revenue growth from the third quarter and 7% year-over-year. The even smaller industrial segment saw a 10% decline from the third quarter and a 7% drop from the year-earlier period, with the Americas and Japan the weakest regions.
Total revenue in the quarter rose 15% over the earlier year to $1.85 billion, while earnings climbed 26% to $2.51 a share. Gross margin moved up to 62% from 58%.
Analysts estimate that 2016 earnings will rise 8% to $9.71 a share, according to a poll by Thomson Reuters.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
