Analog Devices (ADI +0.44%) crushed Wall Street's expectations and delivered a stronger-than-expected guidance thanks to robust demand for its chips from the industrial and automotive markets, among others. The company's fiscal 2021 fourth-quarter earnings report -- released on Nov. 23 -- revealed a sharp jump in revenue and earnings, aided by its acquisition of Maxim Integrated, which closed in August.
Analog's stock price dipped by 1.6% after the report, which is surprising given its impressive results and guidance. Investors, however, should focus on the bigger picture, which suggests that Analog has further to rise even after its 23% gains so far in 2021.
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Analog Devices is making the right moves to grow its business
For the period, which ended Oct. 30, Analog Devices' revenue increased 53% year over year to $2.34 billion, while adjusted earnings increased from $1.44 per share to $1.73 per share. Wall Street was looking for $2.25 billion in revenue and $1.70 per share in earnings, and Analog cleared those estimates as its results exceeded the midpoints of its guidance ranges.
Management credited the company's strong showing in part to its strategy of adding manufacturing capacity throughout the fiscal year in response to the supply-related challenges affecting the broader semiconductor industry. Analog ramped up its capital expenditures to $344 million during the quarter from $166 million in the prior-year period.
Analog plans to continue expanding its manufacturing capacity in 2022 at its factories in the U.S. and Europe. Such a strategy should help Analog fulfill an order backlog it describes as "very strong." As CFO Prashanth Mahendra-Rajah pointed out on the earnings conference call, Analog's book-to-bill ratio was "well above 1 in the fourth quarter."
A book-to-bill ratio of more than 1 means that the company received more orders than it filled, which is an indicator of solid demand for its offerings. That healthy end-market demand and Analog's capability to fill the orders are reflected in the company's guidance. For the current quarter, it expects $2.6 billion in revenue at the midpoint of its guidance range, along with adjusted earnings of $1.78 per share. Those figures are ahead of analysts' consensus estimates for $2.37 billion in revenue and $1.71 per share in earnings.
That points toward healthy year-over-year growth of 19%, as Analog generated $2.18 billion in revenue in the year-ago period (after adjusting for the contribution from the recently acquired Maxim). The good part is that Analog can sustain its impressive growth levels over the long term, as it serves markets where semiconductor consumption is on the rise.
The company is built for long-term growth
Analog Devices gets most of its revenue from the industrial and automotive markets. The industrial market accounted for half of its total revenue last quarter, recording 45% year-over-year growth. For the full year, Analog's industrial revenue increased by 34% to a record $4 billion -- 55% of the company's top line.
The industrial business looks set for growth over the long haul as Analog is targeting lucrative markets such as factory automation. Management has pointed out that factory automation customers are demanding more sensors, connectivity options, and edge processing capabilities for their machines, all of which are leading to an increase in their use of chips.
This increasing connectivity among machines in factories will lead to further expansion of the Industrial Internet of Things, a market that Grand View Research expects to clock nearly 23% annual growth through 2028. On the other hand, the demand for chips in the automotive industry is also increasing at a nice pace due to the rising usage of electronics and connectivity in vehicles, as well as the growing adoption of electric vehicles, which need chips for battery management systems (which Analog sells).
Mordor Intelligence estimates that the global automotive semiconductor market is on track to record 17% annualized growth through 2026, and exceed $101 billion in value at the end of that period. Analog is well-placed to tap into this market as it has partnerships with major automotive OEMs (original equipment manufacturers). Seven of the top 10 electric vehicle manufacturers use its chips.
Analog's automotive revenue nearly doubled year over year last quarter and produced 19% of the company's total revenue. The end-market opportunity and Analog's customer base in this market suggest that it could continue to clock such robust growth levels in the future. Such tailwinds indicate why Analog's earnings are expected to increase at more than 17% a year for the next five years, according to analysts' estimates, and help it remain a top semiconductor stock for years to come.
