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Analog Devices Ready To Leverage A Long-Term Inflection In Chip Demand

Apr. 08, 2021 5:17 PM ETAnalog Devices, Inc. (ADI)IFNNY, NXPI11 Comments
Stephen Simpson profile picture
Stephen Simpson


  • The combination of recovery demand and content growth is driving exceptionally strong demand for the chip sector, and Analog's broad exposure gives it good leverage to this upcycle.
  • Lead times will eventually shrink from the very elevated levels of today, but that correction will be just a dip along a longer-term path of significant multiyear chip volume growth.
  • Given long design cycles and the lack of transformative market/product exposures, the benefits from the Maxim deal are likely to materialize over a number of years.
  • Very few high-quality chip companies are undervalued today, and Analog is no exception as cyclical enthusiasm has driven stretched multiples.

Only by the bubbly standards of the semiconductor sector could Analog Devices’ (NASDAQ:ADI) performance since my late August piece be thought of as disappointing, as the shares have risen almost 40% - lagging the SOX index by around 10 points and likewise lagging other high-quality analog peers like Microchip (MCHP) and NXP Semiconductors (NXPI), with the latter almost certainly getting a boost from its greater leverage to an auto sector recovery.

Pretty much everything is going Analog’s way right now. There are supply constraints, but Analog seems better-placed than average to handle them, and while the communications end-market has remained volatile, 5G deployments are a “when, not if” driver. Meanwhile, auto and industrial demand is recovering, with a host of factors in place to drive content growth for several years.

There will likely be a rollover in the cycle at some point as lead times shrink (though maybe not until late in 2021 or early 2022), but that will be a pause in what I see as a strong “mega-cycle” of chip growth across multiple end-markets. On top of that, the Maxim (MXIM) deal should close this summer, giving the company some cost and revenue synergy opportunities.

Of course, valuation remains problematic. It’s not unusual for multiples to stretch in upcycles, and that’s what’s happening now. I won’t dismiss the possibility of a stronger-for-longer cycle, but I don’t think my 6% organic long-term core revenue growth rate, 45%+ adjusted operating margin, or 40% long-term adjusted FCF margin assumptions are particularly conservative, and the long-term returns just don’t look that exciting now.

Well-Placed For The Dominant Themes

Already a well-regarded, high-performing analog company, the dominant trends and themes in the industry today continue to work in Analog’s favor.

While not traditionally all that strong in autos, Analog has significant opportunities in battery

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (11)

fisherick profile picture
Hey Stephen....thanks for another article on one of my core holdings. Did you happen to see the press release earlier this week re:....ADI working on satellite beaming array technology with a Canadian company called MDA? It prompted me to go to MDA's website. It's the newest iteration of the company that made the Canadian arm on the space shuttle yrs ago. Apparently they are working on a constellation of LEO satellites that sounds to me like a direct challenge to Elon Musk's operation.
Stephen Simpson profile picture
@fisherick Looked at it briefly, but didn't go into much depth. I know MDA a little bit - I owned Orbital Sciences way way back in the day, and they owned MDA for a time. A long and convoluted story there...
fisherick profile picture
@Stephen Simpson ADI's involvement is in this constellation of low earth orbit satellites.....NOt being geostationary, the signals have to be dynamically beamed...constantly adjusting, I guess. MDA just went public....trades on Toronto exchange. The whole situation makes me wonder to what degree space based internet connectivity is going to disrupt things.
Stephen Simpson profile picture
@fisherick Oh, I didn't realize that MDA had gone public! Thanks for that heads-up! I'm skeptical on space-based connectivity. It seems like space-based is always first to the party (satellite radio vs. Spotify; DirectTV vs. streaming, et al) but always gets supplanted by terrestrial technologies. But I've made money there (Orbital, Loral, a few others), so why not?
ADI over AMAT or CREE?
Stephen Simpson profile picture
@SilverBandit Markedly different business models. Least execution risk with AMAT.
@Stephen Simpson But, they are all in the semiconductor realm. It's not like i asked about ADI vs T and ABBV.
Stephen Simpson profile picture
@SilverBandit I think you misspelled "Thank you. I'll check out AMAT a little more."
Stephen Simpson,
which one do you like most out of these three as a long term investment (your personal preference and NOT recommendation): ADI, MCHP and NXPI? Thanks
Stephen Simpson profile picture
@kalu0003 MCHP is third. I like ADI better as a company, but NXPI looks better priced. If they were all equally undervalued, I'd go with ADI.
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