Why Shares of Avago Technologies Ltd. Soared Today

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Shares of Avago Technologies , a manufacturer of semiconductor products, were up about 14% as of 3 p.m. Thursday after the company posted stronger-than expected earnings for its first quarter, guided for higher second-quarter revenue than what analysts were expecting, and announced the acquisition of Emulex .

So what: Revenue rose 131% year-over-year to $1.64 billion, in line with analyst expectations. This huge jump in revenue was the result of the $6.6 billion Avago spent acquiring LSI Corporation in May of 2014. Avago reported non-GAAP EPS of $2.09 during the first quarter, fifteen cents above what analysts were expecting. GAAP EPS came in at $1.26 for the quarter.

Avago expects second-quarter revenue of between $1.59 billion and $1.65 billion, higher than the analyst consensus of $1.54 billion. The company didn't provide guidance for EPS, but analysts are expecting Avago to grow its non-GAAP EPS rapidly in the coming years. The average analyst estimate for non-GAAP EPS for fiscal 2015 is $7.54, up from $4.90 in fiscal 2014.

Avago also announced the $609 million acquisition of Emulex, coming less than one year after its massive acquisition of LSI Corporation. The deal is expected to close toward the end of 2015, being accretive to earnings immediately.

Now what: While Avago's impressive non-GAAP earnings seem to justify the stock price, investors should be aware of how Avago's massive spending on acquisitions creates a huge difference between GAAP and non-GAAP figures. Because Avago paid so much over the book value for LSI, the result has been an explosion of goodwill and other intangible assets on Avago's balance sheet, which rose by about $5.3 billion during 2014. Some of these intangible assets have a finite lifetime, so Avago amortizes them, taking a charge each quarter.

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This amortization is a real expense, even though it's non-cash, because it represents money that's been spent on acquisitions in the past. Avago's non-GAAP net income in 2014 was boosted by $446 million thanks to this item, along with another $280 million from other acquisition-related items. GAAP net income and operating income actually declined during 2014, but the non-GAAP figures paint a much rosier picture.

Investors should never assume that management's non-GAAP figures accurately reflect the performance of the company, especially in the case of high-flying stocks like Avago.

The article Why Shares of Avago Technologies Ltd. Soared Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.