Analog Devices Sees Resilient Industrial and Auto Chip Demand

Analog Devices ADI reported strong fiscal first-quarter results and provided investors with an outlook for the April quarter that was modestly ahead of our prior expectations. Management believes that its auto and industrial businesses are resilient, and while we doubt these good times will last forever if macroeconomic conditions deteriorate, we’re encouraged by the wide-moat company’s chip content gains in these end markets. We raise our fair value estimate to $196 per share from $186 as we modestly expand our gross margin assumptions. The shares appear fairly valued to us.

Revenue in the January quarter was $3.25 billion, flat sequentially but up 21% year over year and at the high end of guidance of $3.05 billion-$3.25 billion. Automotive chip sales were the bright spot, up 7% sequentially and 30% year over year, as the company is especially well positioned in electric vehicles, most notably by supplying battery management systems into Tesla and Chinese EV makers. Industrial revenue held up well, up 2% sequentially and 26% year over year, with broad-based demand as all subsegments grew year over year. Strong sales levels enabled adjusted gross margin to hold up well at an industry-leading 73.6%, down 40 basis points sequentially but up 170 basis points year over year. Adjusted operating margin was flat sequentially at 51.1% as Analog Devices proclaimed that it achieved its operating expense synergies from the Maxim acquisition.

Revenue in the April quarter should be $3.1 billion-$3.3 billion. At the midpoint, the top line would be down only 1.5% sequentially but up 8% year over year, ahead of the annual decline anticipated by rival Texas Instruments, as Analog Devices believes that it is gaining share in analog semis. Adjusted operating margin is expected to remain flattish at 51%.