Avago Technologies Ltd (AVGO), already up 31% on the year through yesterday’s close, tacked on another 10%-plus in early trading Thursday, after reporting blowout earnings that cruised past analyst estimates.
The chip company, which is a key supplier of wireless chips that go in Apple (AAPL) and Samsung (SSNLF) smartphones, is also bound to get stronger as it acquires one of its biggest competitors, Broadcom (BRCM), in a deal worth $37 billion.
Not surprisingly, the strong results also sparked a flurry of analyst upgrades, which no doubt are contributing to Avago’s strong performance Thursday morning.
Let’s take a look at the numbers and the analyst action that sent AVGO shares through the roof on Thursday.
Up Across the Board
Adjusted earnings per share jumped 26%, from $1.99 in the year-ago period to $2.51 in the quarter ended Nov. 1. That handily beat analyst estimates, which called for AVGO to earn $2.38 per share. Revenue at the chipmaker rose 16% to $1.84 billion.
AVGO forecast revenue between $1.74 billion and $1.79 billion in the fiscal first quarter ended Jan. 31, and despite being below the $1.82 billion analysts at Thomson Reuters expected, investors didn’t seem to mind.
A big fear going into the report was that Apple would cut back on its orders, which would materially impact Avago’s business. AAPL investors have been generally cautious about the company’s outlook going forward, especially as its reliance on China as a growth engine comes into question during the slowing of the world’s second-largest economy.
But the numbers didn’t tell that story, and revenue from wireless communications was up 8% year-over-year, while enterprise-storage revenue soared 38%.
Analysts rushed to raise their price targets on AVGO stock: Canaccord Genuity maintained its “buy” rating and upped its price target from $165 to $179, while Mizuho also maintained its “buy” rating and bumped its target from $165 to $175. RBC Capital Markets kept its “outperform” rating, boosting its target price to $155 from $150 per share, while Topeka Capital Markets held firm with a “hold” rating on shares, but now thinks AVGO will advance to $153.
InvestorPlace contributor Joseph Hargett previewed a few trades going into AVGO earnings, and readers who took his advice were amply rewarded. If you were bullish, Hargett said:
“… [you] might want to consider a Dec $130/$140 bull call spread. At last check, this spread was offered at $3.63, or $363 per pair of contracts. Breakeven lies at $133.63, while a maximum profit of $6.37, or $637 per pair of contracts, is possible if AVGO closes at or above $140 when December options expire.”
Investors would have maxed out their profits on such a trade, turning every $363 into $1,000, for a return of 175%.
While the stock itself might not offer investors returns so massive in such a short period of time, it’s obviously lower risk, and with Avago now a main player in a rapidly consolidating chip market, you can understand Wall Street’s enthusiastic vote of confidence.
As of this writing, John Divine was long AAPL stock. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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