Avago's Heading to $45

NEW YORK ( TheStreet) -- For all the talk about the seemingly depressed nature of the semiconductor space, where companies like Broadcom ( BRCM) are fighting to maintain lofty growth expectations, Avago Technologies ( AVGO), coming off two consecutive beat-and-raise quarters, remains one of the best-kept growth secrets on the market.

Perhaps "secret" is not the proper term to use given that the stock is up 25% for the year to date.

But unlike Qualcomm ( QCOM), and to a lesser extent Texas Instruments ( TXN), Avago has had little media coverage.

Here's the thing: As with Qualcomm and Broadcom, Avago enjoys excellent exposure in the wireless handset market. The company is prominently featured in the products of both Apple ( AAPL) and Samsung ( SSNLF).

So when average selling price (ASP) of high-end mobile devices began to come down, which incited fear of saturation and margin pressure for the likes of Broadcom, Avago was still able to grow market share. I'm not going to tell you that Avago has surpassed Qualcomm or that it's even close to launching a threat to Qualcomm's 50% share of the wireless market. But what I do know is Avago has been using its next-generation FBAR system, or Film Bulk Acoustic Resonator, to enable multi-band phones. These are the types of phones that are able to operate in multiple regions of the world.

Essentially, Avago's FBAR system can allow device manufactures like Apple and Samsung to design one phone that can operate on virtually any network. Band fragmentation (among other things) has been one of the biggest headaches for hardware companies since they increase production costs. With Avago's FBAR system, Apple and Sumsung won't have to build various versions of their devices just to support multiple carrier frequencies.

There's no question that margins have become a significant issue in this industry, especially given the recent worries about high-end device saturation. For investors to make money, cutting costs is the name of the game. If Apple wants to preserve margins, especially on its "budget iPhone," there are likely very few alternatives to Avago.

In effect, while the Street insists on focusing on the device battle between Apple and Samsung, Avago is poised to outperform regardless of the outcome. Given that Avago is coming off a quarter where revenue soared 15% sequentially, it should also matter very little to investors which of the two companies (Apple or Samsung) win. Either way, Avago should grow commensurately.

What's more, as with Broadcom, Avago also has a strong networking business, which grew in the recent quarter by 16% year over year, helped by better-than-expected shipments of Cisco ( CSCO) equipment. However, and perhaps even more impressive than the revenue growth, is that with the 19% sequential surge in operating income, Avago is turning itself into a strong profit producer. On a non-GAAP basis, that figure was closer to 21%, which was enough for a 9% beat.

Another thing to consider is that given how strong of a quarter this was, management still raised guidance -- suggesting the company doesn't expect this momentum will be stunted anytime soon. Although Qualcomm has a strong lead in this market and offers similar-to-greater advantages in its partnerships with Apple and Samsung, I believe the near-term share gain opportunities are greater in Avago.

Skeptics will think that I'm being a bit too optimistic. Nonetheless, Avago has been outperforming its peers over the past three years. During that span Avago has averaged 17% revenue growth versus the group's 7%. Likewise, Avago's earnings growth has consistently exceeded its peers by 2%.

To that end, on the basis of the company's guidance -- which supports my long-term revenue growth rate of 8% to 10% -- I now expect the stock will reach $45 per share in the next six to 12 months. Given the company's expected rebound in it industrial/auto segment, investors would be wise to consider Avago as a solid, long-term play in a sector that is looking for leadership.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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