Avago Q4 Results And Guidance Prove Apple Stock Remains Attractive

  • Avago has delivered healthy Q4 2015 results and issued Q1 2016 guidance that was slightly below consensus estimates.
  • Avago is one of the three largest Apple suppliers.
  • The good results have helped quell fears about Apple's future iPhone sales.

When Credit Suisse reported that channel checks with Apple (NASDAQ:AAPL) suppliers had revealed that the smartphone manufacturer had cut components orders by 10%, a general sense of gloom hung over Apple investors who feared that demand for iPhone 6s/6s Plus was weaker than expected. Apple does not source any of its numerous components from a single supplier, and reading too much from the financial reports by its suppliers can be quite misleading. This is more so for large Apple suppliers such as Skyworks Solutions (NASDAQ:SWKS), Qorvo (NASDAQ:QRVO) and Avago Technologies (NASDAQ:AVGO))for whom Apple’s business generally contributes less than 30% to their top line. Nevertheless, sales and sales guidance by these companies has been known to bear quite a strong positive correlation to Apple sales, and can act as a good barometer that tells us what to expect from Apple in the future.

Skyworks, Qorvo, and Avago Technologies content features prominently in the iPhone 6s/6s Plus. Recent teardowns of Apple’s latest smartphones revealed power amplifier modules, switches, filters, and Wi-Fi power amplifiers by the three companies, with Skyworks scoring the most design wins.

Skyworks and Qorvo were the first to report their quarterly results. Both companies comfortably beat on consensus estimates. Skyworks then proceeded to issue strong guidance that helped to allay investor fears regarding a possible slowdown in China (Skyworks has huge revenue exposure in China). Meanwhile Qorvo is a newly minted company, and its rather weak guidance did not faze investors much.

Now Avago has become the third large Apple supplier to report earnings. Avago reported Q4 2015 revenue of $1.85 billion, good for 14.9% Y/Y growth and in-line with consensus estimate by analysts. Meanwhile, the company reported EPS of $2.51, which was $0.13 better than the consensus estimate. Avago said that it expects FQ1 revenue of $1.78 billion (+/-$25 million), which is slightly below the consensus of $1.82 billion. Just like in the case of Qorvo, investors took the light guidance to mean that the company was sandbagging its guidance to give itself a good chance to beat estimates when it finally reports results for the current quarter, sending AVGO shares soaring.

Avago Stock Price 5-Day Returns

Avago

Source: CNN Money

A Difficult Q4 for Apple?

It’s widely expected that Apple will, for the first time since the launch of the iPhone, report negative volume growth during the fourth quarter. Apple sold a staggering 74.5 million iPhones during Q4 2014. The company sold 48 million iPhones during the last quarter, and for it to record positive YoY growth during the fourth quarter it would have to record a stupendous 55% Q/Q growth. The fact that this is likely to be the first quarter that Apple will report a sales decline is truly remarkable when you consider for how long the company has reported an unbroken growth streak.

But the mid-term outlook remains good for Apple. The company pointed out during the last earnings call that only 33% iPhone owners had upgraded to the latest models, which implies the company still has some room to run before the next model arrives in 2016. Apple also pointed out that Android switchers (owners of Android smartphones switching to an iPhone) had reached record levels with 30% of sales being attributed to these buyers. This is great news for Apple since it no longer has to rely almost entirely on an upgrade cycle that is dictated by its existing base of older iPhone users. Apple’s idea for a large screen appears to be working like a charm and has managed to lure users from the Android camp--a really large camp indeed.

Takeaway

The latest earnings and guidance by Avago Technologies, one of Apple’s key component suppliers, suggest that the market overreacted to the reported component order cut by Credit Suisse. Although there is a good chance that Apple will report negative growth during the fourth quarter mainly due to extremely difficult comps, this is something that is widely anticipated by the investing world which limits the downside in Apple stock price. The shares are likely to continue making good gains over the mid and long-term.

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