Stock of the Day

May 28, 2024

Analog Devices (ADI)

$224.03
+$5.99 (+2.7%)
Market Cap: $111.12B

About Analog Devices

Analog Devices, Inc. designs, manufactures, tests, and markets integrated circuits (ICs), software, and subsystems products in the United States, rest of North and South America, Europe, Japan, China, and rest of Asia. The company provides data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; power management and reference products for power conversion, driver monitoring, sequencing, and energy management applications in the automotive, communications, industrial, and consumer markets; and power ICs that include performance, integration, and software design simulation tools for accurate power supply designs. It also offers amplifiers to condition analog signals; and radio frequency and microwave ICs to support cellular infrastructure; and micro-electro-mechanical systems technology solutions, including accelerometers used to sense acceleration, gyroscopes for sense rotation, inertial measurement units to sense multiple degrees of freedom, and broadband switches for radio and instrument systems, as well as isolators. In addition, the company provides digital signal processing and system products for numeric calculations. It serves clients in the industrial, automotive, consumer, instrumentation, aerospace, defense and healthcare, and communications markets through a direct sales force, third-party distributors, and independent sales representatives, as well as online. Analog Devices, Inc. was incorporated in 1965 and is headquartered in Wilmington, Massachusetts.

Analog Devices Bull Case

Here are some ways that investors could benefit from investing in Analog Devices, Inc.:

  • The current stock price is around $218.50, reflecting a strong market position and potential for growth.
  • Analysts have issued a consensus rating of "Moderate Buy" with an average target price of approximately $248.63, indicating positive expectations for future performance.
  • Recent upgrades from multiple analysts, including a price target increase from $200.00 to $250.00, suggest growing confidence in the company's prospects.
  • Analog Devices, Inc. has a solid dividend yield of 1.85%, providing investors with a steady income stream alongside potential capital appreciation.
  • The company maintains a low debt-to-equity ratio, which indicates financial stability and less risk associated with debt obligations.

Analog Devices Bear Case

Investors should be bearish about investing in Analog Devices, Inc. for these reasons:

  • The payout ratio is notably high at 107.90%, which may raise concerns about the sustainability of dividend payments in the long term.
  • Insider selling activity has been observed, with executives selling a significant number of shares, which could signal a lack of confidence in the stock's future performance.
  • The stock has experienced fluctuations, with a one-year high of $247.10 and a low of $158.65, indicating potential volatility that could affect investment returns.
  • Some analysts have downgraded their price targets, reflecting caution about the company's growth trajectory in a competitive market.
  • The high price-to-earnings (PE) ratio of 69.59 suggests that the stock may be overvalued compared to its earnings, which could deter value-focused investors.

Analog Devices Extends Rally: Signals Start to Cyclical Recovery

Written By Thomas Hughes on 5/23/2024

photo of hand holding mobile phone displaying analog devices logo

Analog Devices (NASDAQ: ADI) share prices are surging because a trough is in place, and the outlook is robust. The FQ2 results and guidance for FQ3 aren't robust but show markets stronger than expected, and AI supports the pivot back to growth. End-market inventory normalization is expected for semiconductors in the current quarter, leading to a cyclical recovery for the business. Revenue and earnings are expected to grow sequentially in Q3, return to YOY growth in Q4, and accelerate in 2025. 

Analog Devices Stock Rockets Higher on Better Than Expected Results

Analog Devices struggled in FQ2, but the results were better than feared. The company reported $2.16 billion in net revenue for a contraction of 33.7% but outpaced the consensus estimate by 220 basis points. Weakness was seen in all end markets, led by a 45% decline in communications and a 44% contraction in Industrial. The Industrial segment accounts for more than 55% of the total, so normalization in this market is critical to long-term growth. The Automotive segment, 22% of the net, contracted by 10%, while the Consumer segment contracted by 9% and is 8% of the net.

Margin is another mixed bag of news: gross and operating margins contracted by quadruple-digit basis points on deleveraging and inventory management. However, the net results are better than feared, and the adjusted EPS is $1.40, down 50% compared to last year. That's 13 cents ahead of the consensus, outpacing the top-line strength, and results are expected to improve in FQ3. 

Guidance is favorable, continuing the trend set in Q2. The company guided revenue and EPS above the consensus targets and may exceed the forecast. The company says new orders are improving, giving them optimism a meaningful recovery is in play. Due partly to end-market normalization, the recovery is also supported by AI and the shift to the edge, where Analog Devices is a leader in data creation and connectivity. 

Analog Devices is Levered for Shareholder Success

Analog Devices uses some leverage in its operations, but the amount is insignificant. Long-term debt is less than 0.2X equity with robust cash flow to support balance sheet health despite the downturn in business. Balance sheet highlights at the end of Q2 include an increase in cash, current and total assets, offset by an increase in debt that left equity flat compared to last year. The takeaway is that dividends and share repurchases are reliable and will continue in 2024. 

The dividend is worth about 1.7%, with the stock trading near 36X earnings, a high valuation supported by the growth outlook, dividend payout ratio and high distribution CAGR. The company has increased the distribution for twenty-two years and only pays 60% of this year's earnings outlook. That figure falls to 48% versus the 2025 outlook, suggesting aggressive double-digit increases will continue, and earnings growth is expected to be sustained through 2026.  

Share repurchases are substantial. The company uses share-based compensation but more than offsets it with buybacks. Buybacks reduced the average count by 2% in FQ2 and should continue unabated. 

ADI Stock Surges to New High, Led by Analysts

The analysts set ADI stock up for its post-release surge by initiating new coverage and lifting existing price targets days before the release was due. The activity suggests a move to the high end of the expected range is likely. The high target of $254 is among the more recently set and implies another $20 or about 10% upside on top of the post-release price surge. The analysts will likely continue the trend and revise the range higher because the company indicated a pivot back to growth and expects accelerating growth. 

ADI stock chart

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