Apple, Samsung, and Cisco Can Take This Chipmaker Higher
Avago Technologies is one company that's slated to benefit from different trends in tech. Call it smartphones, tablets, or the Internet of Things, Avago is positioned to profit from them all. The company has well-known customers such as Apple , Samsung , and Cisco that should enable it to tap different end markets.
Driven by such customers and innovative products, Avago's performance has been fantastic in the last year. The stock is up nearly 100%, and the way its top line is growing, it won't be surprising if it continues to perform well.
Analysts' expectations are also high. The company is scheduled to release its second-quarter results on May 29, with revenue expected to grow 17% year over year. In addition, Avago's earnings are also expected to shoot up to $0.76 per share as compared to $0.61 per share in the year-ago quarter.
However, irrespective of the earnings performance, investors should continue holding Avago for a few simple reasons.
The smartphone opportunity
Avago gets almost 20% of its revenue from Apple contractor Foxconn, and this account is getting more lucrative by the day. In fact, it has been reported that Avago had more content in Apple's latest iPhones. Additionally, Avago is also a key supplier for the iPad. On the backs of these two high-volume devices, Avago's radio frequency filters and wireless products have been selling well.
Looking ahead, there's a good chance that Avago could see even better revenue figures thanks to its relationship with Apple. The smartphone giant is rumored to bring out its most evolutionary iPhone this year. According to MacRumors, Apple is slated to launch two different iPhone versions this year, just like in 2013. However, the new devices will sport 4.7-inch and 5.5-inch sapphire crystal screens and come equipped with A8 processors. This will mark Apple's foray into large-screen smartphones, an area where competitors such as Samsung and LG are already present.
Also, since Apple could end up producing 80 million iPhones this year, according to the Economic Daily News, Avago could see a bump in orders.
At the other end of the smartphone spectrum, Avago is benefiting from Samsung's Galaxy S5. According to UBS analyst Steven Chin, Avago's radio frequency filters are in good demand at Samsung. A teardown of the Galaxy S5 indicates the same, as the chipmaker has three chips inside the device. The initial sales trends of the Galaxy S5 have been promising, as the device is tracking ahead of the Galaxy S4. As Samsung builds more units of its current flagship, Avago could again see a bump in orders going forward.
Together, Apple and Samsung, are expected to account for 60%-65% of Avago's sales this year, according to UBS Investment Research. Since both companies are looking to up their game in the smartphone wars, Avago's performance should improve in the future.
Internet of Things: The next big opportunity
Avago's growth prospects aren't limited to just smartphones. Cisco is a 10%-plus customer and the networking giant is counting big on the Internet of Things. According to IDC, IoT-related technology and services are expected to grow at a compounded annual growth rate of 7.9% until 2020, opening a massive revenue opportunity of $8.9 trillion.
Cisco has already started ramping up investments in this platform through its venture capital arm. The company recently invested $150 million in IoT start-ups, taking up its total investments to $250 million. Through IoT, Cisco is looking to connect objects as simple as alarm clocks to the Internet, which would result in higher demand for Avago's RF filters, as they remove interference and allow devices to communicate with one another.
Considering that there will be 50 billion connected objects by 2020, the need for such frequency filters will increase at a good pace. Avago is already a key Cisco supplier, hence the company has a good advantage to benefit from the Internet of Things.
Avago has a number of catalysts that could take it higher as we saw above. In addition, the company has a solid balance sheet. Avago's debt of $2 million is almost negligible when compared to a really strong cash balance of $1.13 billion. Also, Avago pays a dividend yield of 1.60%. Hence, the company looks like a good pick from different quarters.
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The article Apple, Samsung, and Cisco Can Take This Chipmaker Higher originally appeared on Fool.com.Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. 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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