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Avago Technologies Limited (AVGO): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:

We are changing our long-term recommendation on Avago from Neutral to Outperform as we anticipate the stock to perform well above the broader market. Avago reported strong fourth-quarter fiscal 2014 results with adjusted earnings well exceeding the Zacks Consensus Estimate. Avago is one of the leading players in the analog semiconductor market with a wide array of products and a well-diversified customer base. Avago further expects to strengthen its position through organic growth across the industry verticals and increased market penetration buoyed by accretive acquisitions. In addition, the company has also increased its quarterly dividend. However, operating risks regarding high R&D costs for technology-driven products could peg back its profitability to some extent.

Overview:

Based in Singapore, Avago Technologies Limited is a premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems. Avago is currently the 9th largest semiconductor company (excluding memory business) in the world, focusing primarily on products that are developed from the 3rd and 5th groups in the periodic table of chemical elements.

The roots of origination of the company can be traced back to 1961 when it was part of the Hewlett-Packard Company. Over the years, Avago has created a niche market with a separate identity and product line, transitioning from legacy consumer and computing peripherals to a leading manufacturer of semiconductor devices. Avago products primarily serve four target markets: Wireless Communications, Wired Infrastructure, Enterprise Storage, and Industrial & Other. The products are widely used in diverse fields such as smartphones, consumer appliances, enterprise storage and servers, data networking and telecommunications equipment, factory automation and industrial equipment.

Wireless Communications (39% of fourth-quarter fiscal 2014 revenue) serves the smartphone, handset and base station infrastructure markets with leading-edge products that include film bulk acoustic resonator (FBAR) filters, power amplifiers and front end modules. It supports the wireless industry with a broad variety of RF (radio frequency) semiconductor devices. Additionally the segment also provides a variety of optoelectronic sensors for mobile handset applications. With a 50-year history of innovation and skill in amplifier design, FBAR technology and module integration, the segment offers industry-leading efficiency in RF transmitter applications.

Wired Infrastructure (22%) serves the storage and Ethernet networking markets, in which Avago supplies transceivers that receive and transmit information along optical fibers. The product is ideal for switches/routers, data centers, supercomputers and storage/servers. The company provides a range of product bandwidth options for customers. In Ethernet networking, Avago focuses on higher bandwidth applications, principally 10G and emerging 40G and 100G for data center as well as enterprise customers. In storage markets, the company concentrates on fiber channel-based applications including 8G and emerging 16G transceivers.

Enterprise Storage (29%) is a new end market for Avago that resulted from the acquisition of LSI Corporation. This end market deals with LSI's hard disk drive and service storage connectivity product lines.

Industrial & Other (10%): Avago provides a diverse range of products for the general industrial and automotive markets. The cost-effective industrial products offer high insulation resistance, galvanic isolation and noise immunity, thereby addressing the emerging technical challenges of industrial markets. These products serve various sectors including alternative energy, automated manufacturing, motor inverter systems, test equipment, industrial networking, and medical. Avago also offers optical isolators or optocouplers that provide electrical insulation and signal isolation for signaling systems that are susceptible to electrical noise or interference.

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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.

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