How much upside in an analyst call is enough to entice investors? That is a key question that any investor needs to ask when it comes to chasing Wall Street research reports. If it is a Dow Jones Industrial Average or S&P 500 Index stock, the implied upside in most “Buy” and “Outperform” ratings from traditional brokerage firms is currently between 8% to 15% in implied upside. Then there are dividends to consider, as well as market conditions.

And now there is the case around Avago Technologies Limited (NASDAQ: AVGO), along with its pending acquisition of Broadcom Corp. (NASDAQ: BRCM). Two refreshed research reports from Canaccord Genuity are pointing to well above average upside in Avago. That upside may be more limited in Broadcom, but that is because Broadcom is being acquired.

Avago Technologies was reiterated as Buy by Canaccord Genuity analyst Michael Walkley. His price target of $165.00, which is upside of close to 35% from the prior $123.61 closing price. He has adjusted his estimates after solid Broadcom results, noting that the long-term positive thesis remains in place.

24/7 Wall St. would point out that Avago’s shares have been far higher than the current share price. With the price currently around $121, the 52-week range is $81.18 to $150.50. The consensus analyst price target is up at almost $163.00, and the highest analyst price target appears to still be up as high as $185.00. All in all, this means that even a very bullish upside call for 35% or more in implied analyst upside is not that far off-base for the realm of analysts. Perhaps it has more to do with how much the stock is off of its high.

On Avago, Mr. Walkley said:

Avago announced a definitive merger agreement on May 28 to acquire Broadcom Corporation, and we have included Broadcom in our combined Avago modeling starting in the second quarter of Fiscal Year 2016. We believe the acquisition significantly expands Avago’s total addressable market (TAM) and creates a leading global diversified semiconductor company with a broad portfolio of category-leading products and a leading customer base addressing the wireless and wired infrastructure, enterprise & data center networking and storage, IP traffic routing, Home/Internet of Things, and Industrial verticals. Management expects the deal will close by the first quarter of calendar year 2016 and anticipates it will be immediately accretive to pro forma earnings per share and free cash flow. The Broadcom acquisition is consistent with our thesis that Avago’s proprietary technologies, strong IP, and diverse customer base in several growth markets position the company for solid long-term sales and earnings growth with industry-leading margins.

Perhaps what matters the most is how to evaluate the Broadcom earnings report in relation to what it means for Avago in the future. Canaccord Genuity analyst Matthew Ramsay talked up positive earnings here, with strong revenues in both divisions — driven by strong connectivity sales into iPhone 6S and better than feared ING revenue given the choppy macro environment.

Mr. Ramsay did note that management did not host a conference call, and guidance was not given other than noting that the Avago deal is still on track to close in the first quarter of 2016. He maintained his Hold rating on Broadcom, as well as the $54.50 price target, which is equivalent to the cash component of the Avago transaction. On how this view will play into Avago, Mr. Ramsay said:

Despite a still mixed overall macro environment, we believe Broadcom and Avago’s complementary but non-overlapping product portfolios and compelling additional scale and cost synergies that should be generated from the combined business make the deal attractive long-term for shareholders of both companies. The resulting company would be the third largest semiconductor company by revenue with strong growth portfolio of category-leading products to address the wireless and wired infrastructure, enterprise & data center networking and storage, IP traffic routing, Home/IoT and Industrial verticals. Further, we believe the compelling synergies and scale when combined with Avago will generate shareholder value incremental to Broadcom’s standalone core businesses. We maintain our HOLD rating and $54.50 PT, equivalent to the cash component of the Avago transaction.

ALSO READ: Why Shareholders Just Will Not Like IBM’s New Stock Buyback

Broadcom was seen down almost 1% at $50.98 late on Tuesday, with a $31 billion market cap. Avago was down almost 2% at $121.30, with a market cap just north of $33 billion.

After this deal is completed, Avago will be among the strongest diversified chip companies in the world. Avago’s sales were almost $4.3 billion in 2014 generating operating income of $438 million, while Broadcom’s revenue of $ 8.43 billion generated operating income of $694 million.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.