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Avago is the New Giant Dominating Technology


Written by Ophir Gottlieb, 10-13-2015

Avago is a radically innovative and acquisitive technology company based in Singapore growing faster than every company technology above $10 billion in market cap. The company is soon to be so well diversified and so comprehensive in its offerings, that it may be the single most important company in technology not named Apple, Google, Amazon or Facebook. It's best known as a supplier of Apple's iPhone chips which help reduce interference from other communications devices, and as smartphones get smarter, the company has grown on smartphone demand in China and diversified through acquisitions (Source: IBD).

Here is the absurd stock return comparison over the last two-years:

The company's focus is in wireless and as a 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. We must note that terms have been agreed upon where Avago will acquire Broadcom for $37 billion, making it the largest ever merger between chip makers according to Bloomberg. We also must note that BRCM's revenue is nearly twice that of Avago, so the diversification makes this combined entity frighteningly more powerful.

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First, Avago
Before we dive into the BRCM deal, let's look at AVGO on its own, and yeah, on its own is incredible. In fact, let's take a look at the technology sector and all firms above $30 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.

We can see Avago is growing revenue faster than any of its peers, and while a good deal of that has been through acquisition, make no mistake, this company has organic growth as well. The stock went public at $15 a share in 2009 and is now up more than 650%. The stock is up more than 60% in the last year alone, even after the correction.

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What's Going On
The Internet of Things (IoT) opportunity is considerable in particular for semiconductor companies; the segment as a whole is expected to reach hundreds of billions of dollars by 2020. Avago has diversified its business the best it can working within wireless, fiber optics, server storage, PCIe switches and bridges, LEDs and displays, optical sensors, motion control encoders and ASICs (system on a chip). Now there's an expansion into chips and software for enterprise storage via the $6.6-billion acquisition of LSI.

As of today, Apple accounts for nearly 40% of revenue but that's before the BRCM acquisition. The company also has Samsung as a wireless customer, so the firm is literally at the forefront of technology. Again, let us recall that BRCM has twice the revenue of Avago, so the threat of Apple's disengagement has been radically reduced. This is an Internet of Things play, period.

Revenue growth over the last year was 94% and over the last two-years was 174%. Here's a chart of that revenue growth through time.

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Broadcom Acquisition
The combination of BRCM and AVGO will make the an even even more competitive firm with enormous clients like Apple and Amazon. Networking will now be the largest unit of Avago's business and the company has claimed that the firm will recognize $750 million of savings within just 18-months of closing.

"Analysts at Pacific Crest say deal synergies will allow Avago to earn $12 a share in calendar 2016."

Gartner research does a wonderful job of delineating the specifics that BRCM will bring to Avago, and here they are:

"Wireless: Broadcom is the leading supplier for wireless combo chips (Wi-Fi, Bluetooth and GPS) for mobile phone and consumer wireless platforms.

Networking Application-Specific Standard Semiconductors: Broadcom dominates the switching and the PHY semiconductor markets.

Broadband: Broadcom provides an end-to-end solution for the broadband access platform, from the networking pieces (such as xDSL, cable modem and MoCA) to video processing."

Source: With Deal to Buy Broadcom, Avago Aims to Dominate Communication Markets

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Together with Broadcom, Avago is perhaps the most agile and diversified IoT company right now. Net income over the trailing-twelve-months (TTM) and levered free cash flow (TTM) are both at all-time highs as is revenue and research and development. While Nvidia and NXP Semiconductors are the crown jewels of tomorrow for the technology revolution, as of right now, Avago may be the single most important company in technology not named Apple, Google, Amazon or Facebook.

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