Analog Devices Earnings: A Cyclical Downturn Is on the Horizon

Wide-moat Analog Devices ADI 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.

Revenue in the July quarter was $3.08 billion, down 6% sequentially and 1% year over year, and just below the midpoint of guidance of $3.10 billion. By end market, communications infrastructure was the culprit, as North American wireless infrastructure spending has cratered, causing ADI’s revenue to fall 16% sequentially and 23% year over year. Industrial revenue fell 7% sequentially but was up 5% year over year, with healthy demand in green energy solutions. Automotive revenue held up well, down 5% sequentially but still up 13% year over year, as some of the company’s core growth products, like battery management systems and in-cabin audio, grew over 30% year over year, per management. Adjusted gross margin fell 150 basis points, as expected because of lower sales levels and factory underutilization, but remained a stout 72.2%.

Revenue in the October quarter is forecast to be $2.7 billion at the midpoint, well below FactSet consensus estimates (and our prior estimate) of $3.0 billion. Revenue is expected to fall 12% sequentially and 17% year over year, as macroeconomic headwinds weigh on demand.