Broadcom: Evolution of Avago

05/03/2016 8:00 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

The latest addition to our Growth Portfolio is among the best of the breed; it has a big connectivity franchise in a world rushing to become ever more connected, asserts growth expert Stephen Leeb, editor of The Complete Investor.

Seven years ago Agilent spun off Avago. It promptly acquired LSI Logic, a leader in specialized chips (and owner of storied research shop Bell Labs).

And in 2015 Avago acquired Broadcom (AVGO) a leading designer and manufacturer of chips for wired infrastructure such as the cloud, big data, video streaming, and the Internet of things (IOT).

The merged company took on the Broadcom name, while remaining under the farsighted leadership of CEO Hock E. Tan. 

If the history sounds convoluted, the main takeaway is that Broadcom has morphed into a company in which wireless and wired communications each contributes about 40 percent of revenues.

Enterprise storage, a much slower growing area, and various industrial applications supply the rest. In Avago’s pre-Broadcom guise, enterprise storage and industrial products accounted for 40 percent of revenues.

One of the company’s most important franchises is in specialized equipment for mobile phones, particularly products that translate analog sound into digital sound.

The company has a 70 percent market share in FBAR filters, which filter unwanted frequencies from mobile transmissions, a market growing by more than 30 percent a year. It’s hard to find another technology company with such a strong grip on a critical and fast growing market.

Broadcom’s connectivity franchises make it highly leveraged to the IOT, an area that promises explosive growth. More than 50 percent of the company’s revenues come from China, where current urban areas are slated to become mega cities of 100 million people or more — prime IOT territory.

As synergies between the merged companies take hold, we look for 20 percent growth well into the next decade.

A strong case can be made for profits above $14.00 a share in calendar 2017, up from $9.00 in 2015 and $10.75 in 2016, while 2017 free cash flow could top $13 a share. We expect the stock to trade between $250 and $300 within the next two to three years.

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 By Stephen Leeb, Editor of The Complete Investor

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