Analog Devices Earnings: A Cyclical Downturn Is on the Horizon; $196 Fair Value Estimate

Wide-moat Analog Devices reported decent fiscal third quarter results but provided investors with a disappointing forecast for the October quarter as it suggests a further deceleration of broad-based chip demand and an inventory buildup at many of its customers across all end markets and regions. ADI’s rival, Texas Instruments, made similar comments last month, so we don’t believe ADI is losing share or facing any company-specific headwinds. We’ve reduced our near-term estimates for fiscal 2024 but still maintain our $196 fair value estimate, as we think ADI can weather this storm, and we agree with management’s view that it can achieve a 7%-10% long-term CAGR. In turn, we’re starting to see an attractive margin of safety in this best-of-breed chipmaker for long-term, patient investors willing to ride out a further slowdown in demand.