Morningstar

Analog Devices Earnings: Raising Fair Value Estimate with AI Strength

We think ADI’s high-quality analog business is well positioned to prosper in AI.

An illustration showing a close-up semiconductor chip connected to other semiconductor components, illustrating its integration in AI technology
Securities in This Article
Analog Devices Inc
(ADI)

Key Morningstar Metrics for Analog Devices

  • Fair Value Estimate
    : $445.00
  • Morningstar Rating
    : ★★★
  • Morningstar Economic Moat Rating
    : Wide
  • Morningstar Uncertainty Rating
    : High

What We Thought of Analog Devices’ Earnings

Analog Devices ADI reported fiscal third-quarter revenue of $4.02 billion, up 40% year over year and above the high end of guidance. ADI expects October-quarter revenue of $4.3 billion, up 40% year over year and above FactSet consensus estimates of $4.08 billion.

Why it matters: ADI is firing on all cylinders with a strong cyclical recovery in industrial end markets and a data center chip business that doubled year on year and looks like it might double again in fiscal 2027. ADI is also passing along price increases to its customers, boosting gross margins even further.

  • ADI’s communications segment, in which data center revenue is 80% of revenue, was up 84% year over year, as the firm’s high-performance parts are gaining traction in optical and power applications within artificial intelligence data centers.
  • Adjusted gross margin was 72.5%, up 330 basis points year over year, thanks to higher sales and favorable product mix. ADI’s pricing actions and favorable mix and utilization should boost adjusted gross margin to 74% in the fourth quarter and, likely, several quarters thereafter.

The bottom line: We raise our fair value estimate for wide-moat ADI to $445 per share from $380 as we’re optimistic about ADI’s ability to come close to doubling its AI data center revenue in fiscal 2027, while maintaining excellent gross margins. Shares in this high-quality business appear undervalued.

  • Shares were flattish on the earnings report, as we surmise that the market was already anticipating a beat-and-raise quarter. We think ADI’s high-quality analog business is well positioned to prosper in AI, and we’re encouraged with management’s bullish commentary on its AI design wins.

Coming up: ADI didn’t dismiss suggestions on the call that it might grow its revenue by 20% in fiscal 2027 and in the teens thereafter, thanks to booming AI chip demand. Meanwhile, we think ADI is well-positioned in robotics and other physical AI applications as they come to market over time.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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