Analog Devices Sends Signal to Market: Growth Will Return

Key Points

• Analog Devices had a better-than-expected quarter and is forecasting sequential improvements to continue.
• Cash flow remains sufficient to sustain balance sheet health while paying dividends and buying back shares. 
• Analysts' consensus is narrowing around the $245 level, a new all-time high when reached. 

Analog Devices NASDAQ: ADI is not out of the weeds, and it will take time to recover fully, but the bottom is in for the semiconductor business, and the rebound is underway. The takeaway from the FQ3 results is that sequential growth persists, and improving client inventory and order volumes point to YoY growth resuming by FQ1 2025. This means investors can expect the stock price to continue rising, aligning with the long-term trend, because cash flow is positive, driving substantial capital returns, and it is expected to get better as the quarters progress. 

Analog Devices Builds Value While Making Semiconductor Solutions

Analog Devices struggled in Q3 as high inventory and a sluggish rebound in demand weighed on results—however, the 25% revenue decline aligned with the analysts’ forecasts, including sequential growth. The company reports sequential strengths in most segments, led by the Consumer segment, which grew compared to last year. Industrial and Communications were the weakest segments, with declines of 37% and 26%, respectively. 

The margin news is also mixed. The company experienced significant deleveraging due to the revenue contraction, leaving the gross and operating margins down by 710 and 900 basis points. The critical detail is that the margin contracted less than forecast, leaving the adjusted EPS of $1.50 above projections and cash flow sufficient to sustain capital returns until the rebound gains traction. 

The guidance is tepid but aligns with the expectations for the business to improve. The company guidance for Q4 results matches the consensus forecasts for top and bottom-line results, expecting the business contraction to continue slowing. Revenue is expected to be near $2.4 billion, down about 11% YoY, and to continue growing sequentially in F2025. The business could return to YoY revenue growth in Q1 2025, barring any economic slowing. 

Analog Devices Produces Positive Cash Flow: Returns Capital to Shareholder

Analog Devices is producing positive cash flow despite the business contraction. Cash flow in Q3 and YTD is sufficient to increase cash on the balance sheet while paying dividends and repurchasing shares, which reduces the share count. Balance sheet highlights include a nearly 3x build in cash compared to last year, offset by reduced intangibles and increased debt, which left total assets and equity flat. Regarding share buybacks, buybacks reduced the count by an average of 0.9% in Q3 and are expected to continue. 

Investors worried about the recent shelf filing to sell debt securities shouldn’t waste too much time. The filing doesn’t mean the company will increase its debt but sets it up to improve its debt structure as interest rates fall. The company's leverage is incredibly low at 3x cash and 0.2x equity, and cash flow is sufficient, leaving it in a healthy financial condition and able to pay and increase its dividend annually. The payout is worth about 1.6%, has been increased for 20 consecutive years, and is only 50% of earnings; this payout is safe and on track for inclusion in the Dividend Aristocrat index. 

Analysts Response Is Mixed: New Highs Are Likely

The analysts' response to Analog Devices report is mixed, with some raising and some lowering their stock price targets, but the result is bullish for the market. The 24 analysts tracked by MarketBeat.com show a high conviction in the consensus Moderate Buy rating and $245 price target. The $245 price target is about 10% above the recent action and puts the market at an all-time high. That may be reached by year’s end or early 2025, assuming the rebound continues; a higher high is likely if the rebound gains traction. 

The price action in ADI stock is mixed following the release. The market surged, but profit-taking and repositioning efforts capped gains. Resistance is at the $228 level and may be strong enough to keep the market from setting a new high soon. In this scenario, the stock price could fall to $210 or lower before the next rebound begins, and it may only move up to a new high later in the year when more news is out. One potential catalyst for higher prices is the FOMC meeting in September, when the committee is expected to cut interest rates.