Despite Recovering Demand, Analog Devices Stock Seems To Have Peaked

KIEV, UKRAINE – November 6, 2018: The Analog Devices, Inc logo is featured on a smartphone in this photo illustration… [+]. Analog Devices, Inc., usually known as ADI or Analog, is a multinational semiconductor firm based in the United States that specializes in data conversion and signal processing technologies. (Photo courtesy of Getty Images/Igor Golovniov/SOPA Images/LightRocket)
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Analog Devices stock (NASDAQ: ADI) has gained about 20% since the beginning of the year, and at $171 per share, we feel the company has a 15% potential downside.
What is the reason for this? Our conclusion is based on the fact that ADI stock has increased by twofold since the end of 2018, and after reporting mixed Q2 2021 results, we predict ADI stock will continue to decline. What Factors Caused A 99 Percent Change In Analog Devices Stock Between 2018 And Now, According To Our Dashboard? gives the essential numbers that underpin our approach, and we go over them in greater detail below.

Trefis in Stock Prices

Analog Devices is a semiconductor business that makes solutions for signal processing and power control, among other things. ADI’s prices have risen since 2018, despite sales remaining relatively flat over the last four quarters. However, net margins increased from 24.2 percent to 25.2 percent during this time, and EPS (profits per share) increased from $4.05 in FY 2018 to $4.24 on an LTM basis, thanks to a small 1% decline in outstanding shares.
Furthermore, ADI’s P/E (price-to-earnings) ratio increased from 21x in 2018 to 47x by the end of 2020, but has subsequently fallen to 40x. Given Analog Devices’ mixed Q2 ’21 performance, we feel the P/E multiple faces a probable downside risk.
ADDITIONAL INFORMATION FOR YOU
So, what’s the most likely cause of this downturn and when will it happen?
Because of the global spread of the coronavirus, demand for computing and hardware devices fell across all markets, resulting in lower semiconductor demand and lower demand for Analog Devices’ products. Analog Devices’ Q4 2020 financial results backed this up, with revenue falling to $5.6 billion from $6 billion in 2019. Furthermore, operating margins were lower at 26.7 percent vs. 28.5 percent in 2019, as cost of sales and operational expenditures fell at a slower rate. This dragged on EPS, which fell to $3.31 in 2019 from $3.68 in 2018.
However, demand has since increased, with revenue in Q2 2021 reaching $1.66 billion, up from $1.32 billion in Q2 2020. Operating expenses were kept under control, resulting in an increase in EPS to $1.15 from $0.73.
It’s worth noting, however, that revenues in FY 2020 (at $5.6 billion) were significantly lower than those in FY 2018, which totaled $6.2 billion. Despite demand and revenues increasing year over year in Q2 2021, we feel Analog Devices’ overall revenue and profits pattern since FY 2018 does not justify such a high P/E multiple. While Analog Devices’ FY 2021 earnings (expected at the end of this year) will provide more clarity, we believe that the stock’s P/E multiple will fall from 40x to 32x in the near term, despite a slight increase in revenues and margins, resulting in a stock price drop to as low as $145, a 15% drop from its current price.
While Analog Devices’ stock may fall, it’s important to know how its competitors fare. Analog Devices Stock Comparison With Peers shows how Analog Devices stacks up against its peers on key parameters. Peer Comparisons has a lot more of these kinds of valuable comparisons.
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