Broadcom Inc

NASDAQ:AVGO   3:59:59 PM EDT
433.85
-6.09 (-1.38%)
4:16:55 PM EDT: $435.18 +1.33 (+0.31%)
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Why Avago May Be the Most Compelling Stock in All of Technology



Fundamentals

##Symbol##AVGO

Avago is a Singapore-based chipmaker that supplies chips to help speed up processing in cloud data centers. With the Internet of Things (Iot) segment exploding, the firm is perfect position to continue growth. The IoT opportunity is considerable for semiconductor companies; the segment as a whole is expected to reach hundreds of billions of dollars by 2020. And when I say AVGO will "continue growth," I note that the firm is the fastest growing company in the entire S&P 500. In fact, let's take a look at the technology sector and all firms above $20 billion in market cap. On the x-axis we will equal space the companies (rank) and on the y-axis we plot revenue (TTM), one-year growth.


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Avago's revenue growth has been both organic and through acquisition. Last year the company acquired LSI Corp and PLX Technology Inc, both of which have substantially increased the top line. Meanwhile the stock is up 511% over the last five-years and nearly 80% in the last year. On May 28th, the company reported a blow out earnings quarter and the stock popped yet again. The company reported it may acquire Broadcom (BRCM) as well.

And who is this firm's largest customer? None other than Apple.

AVGO is poised to continue to grow organically as the IoT segment explodes, and it is now a major player in the semi-conductor market, a market once totally and utterly dominated by Intel (INTC). Further, wireless growth at both Apple and Samsung, as well as eventual product diversification point to large opportunities in several spaces. Revenue growth over the last year was 199% and over the last two-years was 159%.



Technicals   |   Support: 132.01   |   Resistance: 143.275   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

AVGO has a four bull (high rated) technical rating because it's trading above both its 50- and 200-day moving averages. We do note that the stock is trading below the short-term 10-day moving average.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-27 $1.94 $1,742.4 M $1,740.0 M $1,614.0 M Provided by ZACKS


Let's look at the core elements that drive the company's fundamental rating.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 6,108 2,792 2,362

Operating Margin (QTR) 1.362 1.32 1.27 RISING

Net Income (TTM US$ Millions) 666 606 542 RISING

Levered Free Cash Flow (TTM US$ Millions) 929 398 264 RISING

Research and Development (US$ Millions) 251 114 95 RISING

Research and Development Expense/Revenue 0.156 0.163 0.169 FALLING





Stock Returns and Chart

AVGO is up +7.6% over the last three months and up +34.4% over the last six months. The stock price is up +78.9% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 6,1082,7922,362


Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (ten quarters in this case).

AVGO is not only growing revenue by 118.77% year-over-year, but it's 5 fundamental (star) rating implies that the revenue acceleration is pushing the core fundamentals of the company forward. While massive revenue growth often times comes at the expense of earnings, free cash flow and operating margins, that is not at all the case for AVGO. We also note the nearly 160% growth in revenue over two-years.

What do all these numbers mean?
AVGO's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 666606542RISING


While revenue is increasing, we note (again) that it is not at the expense of earnings, unlike so many other growing technology firms. Net Income (after tax profit) over the trailing twelve months (TTM) for AVGO is up to an all-time high of $666 million.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Levered Free Cash Flow (TTM US$ Millions) 929398264RISING


Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For AVGO the metric is rising (it was $398 million last year). For the most recent trailing-twelve-months the company reported Levered Free Cash Flow (TTM) of $929 million. That's a remarkable 133% rise year-over-year. That means, the FCF is actually outpacing the stock rise, which is CRAZY given how fast the stock is rising.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note the rising bars from a year ago (four quarters ago).



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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Research and Development (US$ Millions) 25111495RISING


Research and Development is the life blood of semi-conductor companies. In fact, Intel (INTC) spends more on R&D than any other firm in the world in ALL industries. AVGO has seen R&D rise 120% year-over-year and 165% over the last two-years. Keep all of this in mind, that the firm is on a wild spending spree yet net income and free cash flow are at all time highs.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars. Note the rising bars from one-year ago.


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Summary
Avago now sees revenue, net income, free cash flow and R&D at all-time highs. It's the fastest growing company in the entire S&P 500, and its stock price is up more than 500% in the last five-years and nearly 80% in the last year. Those absurd numbers are tempered by the fact that free cash flow is growing faster than the stock price.

The firm has grown organically and through acquisition and is poised to grow in both ways even further. The IoT segment is a booming segment and AVGO is tearing away at market share. With all of the realities now in place, it's not impossible to say that, Avago may be the most important stock in all of technology.