Analog Devices (ADI +1.95%) crushed Wall Street's expectations when it released its fiscal 2022 first-quarter results on Feb. 16, but shares of the semiconductor specialist have headed south since the earnings report in a shocking move.
Shares are down nearly 5%, but this is a great opportunity for investors looking to buy a top tech stock right now. Wall Street analysts have a median price target of $210 on Analog stock, which points toward a 31% upside from current levels. The Street high price target of $245, meanwhile, would translate into 53% gains.
It won't be surprising if Analog stock hits the high estimate given its terrific pace of growth that's being driven by multiple catalysts. Let's take a closer look at them.
NASDAQ: ADI
Key Data Points
Analog Devices is on a hot growth streak
Analog Devices' Q1 revenue shot up 72% year over year to $2.7 billion, while adjusted earnings increased 35% to $1.94 per share. Analysts were looking for $1.80 per share in earnings on $2.6 billion in revenue. The chipmaker crushed those estimates thanks to the growth in its automotive and industrial businesses, as well as the impact of the Maxim Integrated acquisition that was completed in August 2021.
Analog reported an adjusted gross margin of 71.9% for the quarter, an increase of 190 basis points over the prior-year period. The company's operating margin increased by an impressive margin of 510 basis points year over year to 45.8%.
Image source: Getty Images.
It is worth noting that Analog Devices' revenue increased 23% year over year if we assume that Maxim Integrated was a part of its business in the prior-year period. That's an improvement over the 18% year-over-year revenue growth the combined businesses would have reported in Analog's fiscal 2021 fourth quarter. So, the consolidated company is now growing at a faster pace as Analog is unlocking the benefits of its latest acquisition.
Analog Devices' guidance for the current quarter indicates that its significant growth is here to stay. The company anticipates $2.8 billion in revenue this quarter, an adjusted operating margin of 46.5%, and adjusted earnings of $2.07 per share. The numbers are way ahead of analysts' expectations of $1.86 per share in earnings on revenue of $2.7 billion.
More importantly, Analog Devices could sustain its hot streak over the long run thanks to the secular growth of the markets it serves.
The company's momentum is here to stay
The industrial segment is Analog Devices' largest business, producing half of the company's revenue last quarter and recording 57% year-over-year growth. The company sees several secular trends driving the growth of this segment, such as factory automation, the growing demand for test and measurement equipment, and automotive electrification.
For instance, the industrial automation market is expected to generate $355 billion in revenue by 2028 as compared to $191 billion last year. Meanwhile, the industrial Internet of Things market is expected to clock a compound annual growth rate of 21% through 2026, which would create the need for more industrial connectivity solutions and sensors that Analog Devices sells.
On the other hand, the market for battery management systems used in electric vehicles is expected to increase at an annual pace of 28% through 2027, according to Mordor Intelligence. Analog Devices is in a solid position to take advantage of this fast-growing space as it claims to be the global leader in battery management systems.
The company says that it has "double the market share of our nearest competitor" and boasts of new design wins in this market from European automakers, which should help sustain the company's stunning growth. Throw in the fact that Analog is also benefiting from the rollout of 5G wireless networks across the globe, and it becomes easier to understand why the company's growth is here to stay.
The communications business accounted for 15% of Analog's revenue last quarter, and it recorded 15% year-over-year growth in revenue (including Maxim's revenue in the prior-year period) to $412 million. Analog Devices CFO Prashanth Mahendra-Rajah points out that 5G rollouts should gain momentum in North America and globally in 2022 and beyond, which should ensure better days ahead for the communications business.
Why you should be buying
In all, Analog Devices has a lot going for it. The company's growth has accelerated after its recent acquisition and its presence in rapidly-growing end markets points toward a brighter future. Additionally, Analog Devices sports a dividend yield of 1.90%. The company raised its payout by 10% on Feb. 15, which was its 19th increase in the past 18 years.
So, investors have a chance to buy a potential growth stock that pays a nice dividend at just 19 times forward earnings right now, which looks like a good deal since shares of Analog Devices are cheaper than the NASDAQ-100's forward earnings multiple of 24.8.
