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The Time to Buy This Tech Stock's Turnaround Is Finally Here

By Harsh Chauhan - Dec 2, 2020 at 8:45AM

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A recovery in semiconductor sales is lifting this chipmaker.

Analog Devices ( ADI 0.15% ) has been showing promising signs of a recovery from the negative repercussions of the coronavirus pandemic, which hurt its sales in key sectors like industrial and automotive earlier this year.

The semiconductor specialist reduced its revenue decline to a trickle in the third quarter of fiscal 2020 after suffering from huge drops earlier in the year. And now, its latest fiscal 2020 fourth-quarter results indicate that a recovery in its financial performance is well and truly underway. Let's see what's working for Analog Devices, and why this tech stock is worth buying now.

Person pressing the buy button.

Image source: Getty Images.

Analog Devices' turnaround is finally here

Analog Devices recorded 6% year-over-year revenue growth for the fourth quarter of fiscal 2020, which ended on Oct. 31, 2020, exceeding the higher end of its own outlook. Its top line of $1.53 billion breezed past the Wall Street estimate of $1.45 billion. The company's adjusted earnings increased from $1.19 per share a year ago to $1.44 per share last quarter, ahead of the $1.33 consensus estimate.

Analog Devices also recorded a nice bump in its margins. The company's adjusted gross margin increased 160 basis points year-over-year to 70% during the quarter, while the adjusted operating margin jumped 290 basis points over the prior-year period to 41.7%.

Analog managed to deliver these improvements thanks to growth across all its segments, especially in automotive and communications. The automotive business has taken a hit this year as coronavirus-related restrictions led to the closure of manufacturing plants across the globe. Counterpoint Research estimates that automobile sales in the U.S. could drop a whopping 24% in 2020.

Other important automotive markets such as China and Europe have also been struck badly this year. But green shoots have emerged in the automotive market of late as pent-up demand has led to an increase in production, triggering a recovery in the industry. This has been a tailwind for Analog Devices, as it gets 15% of its revenue from the automotive business. The company's automotive revenue shot up 40% sequentially in the fourth quarter, and showed modest year-over-year growth.

Analog Devices' automotive business could keep getting better, as sales of new cars are expected to increase in the double digits next year. Additionally, a spurt in the sales of electric vehicles (EVs) would be another tailwind for Analog Devices, as it supplies battery management systems to automakers. General Motors recently announced that it will be deploying Analog Devices' wireless battery management system, which helps increase the volume of the battery pack.

Sales of EVs are expected to jump from an estimated 2.5 million units this year to 3.4 million units in 2021, according to The Economist Intelligence Unit. More importantly, this market would be a long-term tailwind for Analog, as sales of battery management systems are expected to grow at an annual rate of 15% over the next five years, according to third-party estimates.

Analog Devices' industrial business, which supplies 53% of its revenue, also did well last quarter, recording 9% year-over-year growth. Within the industrial business, automation revenue witnessed its first growth in two years.

Better days ahead

The good news for Analog Devices is that its momentum is here to stay, as the recent uptick in semiconductor sales is expected to continue into 2021. According to a third-party estimate, global semiconductor sales could jump 12% next year after an estimated increase of 4% in 2020.

Not surprisingly, Analog Devices' top and bottom lines are expected to clock impressive growth in the next couple of fiscal years, according to analyst estimates compiled by Yahoo! Finance. Its earnings are expected to grow in the mid-teens this year, followed by another year of double-digit growth in the next fiscal year.

All of this makes Analog Devices a semiconductor stock that investors might want to consider snapping up -- it looks all set to step on the gas in the coming months and trades at a not-so-expensive 24 times forward earnings.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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