Technology stocks have taken a beating in 2022, with the Nasdaq-100 Technology Sector index down nearly 33% so far. By comparison, chipmaker Analog Devices (ADI -1.03%) has shown a lot of resilience thanks to the impressive growth it has been delivering quarter after quarter.
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Analog Devices strong showing continued in its recently released fiscal 2022 second-quarter results (for the three months ended April 30). The company's revenue and earnings crushed Wall Street's expectations, and the company's guidance turned out to be significantly better than what analysts were expecting. Let's take a closer look at what's driving Analog Devices' impressive growth.
Analog Devices is growing at an impressive pace
Analog Devices reported fiscal Q2 revenue of $2.97 billion -- an increase of 79% over the prior-year period -- thanks to impressive growth across all its end markets such as industrials, automotive, communications, and consumer devices. The company's adjusted earnings shot up 56% year over year to $2.40 per share.
Wall Street would have settled for $2.11 per share in earnings on revenue of $2.84 billion. However, the booming demand for Analog's chips from multiple end markets, as well as the synergies from the acquisition of Maxim Integrated that was completed in August 2021, helped the company deliver better-than-expected numbers.
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Even better, Analog's guidance indicates that its terrific growth is here to stay. The company anticipates $3.05 billion in revenue in the current quarter at the midpoint of its guidance range, along with adjusted earnings of $2.42 per share. That's well ahead of the consensus estimates of $2.17 per share in earnings and $2.9 billion in revenue. Analog Devices also reported $1.72 per share in earnings on $1.76 billion in revenue in the third quarter of fiscal 2021, which means that its revenue and earnings are set to pop nicely once again.
The impressive part about Analog Devices is that its results are solid despite the supply chain shortages that have plagued many other chipmakers. The company credits its "geographically diverse hybrid manufacturing strategy" that has allowed it to build a "diverse network of internal and external partners to best manage our operations through economic cycles." In other words, a diversified supply chain seems to have helped Analog Devices insulate itself from the supply chain challenges that the semiconductor industry is facing.
Additionally, Analog Devices' 75,000 product SKUs (stock-keeping units) are used by 125,000 customers. The company points out that 80% of its revenue comes from products that "individually contribute no more than 0.1% of total revenue." Additionally, Analog CEO Vincent Roche points out that the company's business is protected by high barriers to entry.
All this indicates that the chipmaker is on track to sustain its impressive growth momentum for a long time to come, which won't be surprising given the markets it serves.
The terrific growth is here to stay
Analog Devices gets most of its revenue from the industrial business, with the segment producing 51% of its top line last quarter and registering 54% year-over-year growth. The segment's healthy growth was driven by the demand for chips used in automation, digital healthcare, and instrumentation and testing. The company increased its share in these markets, and that bodes well for the long run, as they seem built for long-term growth. Industrial automation, for instance, is expected to become a $234 billion market by 2028 as compared to $140 billion in 2021.
Similarly, demand for chips used in the automotive segment, which was Analog's second-largest business last quarter with 21% of the revenue, is going to be another notable catalyst. Analog recorded 145% year-over-year growth in the automotive business thanks to the growing adoption of battery management systems (BMS) used in electric vehicles and increasing chip content in vehicles nowadays.
The company points out that its automotive momentum is sustainable as its chips continue to be designed into new products. Throw in the fact that the demand for automotive chips is expected to clock an annual growth rate of more than 13% over the next decade as per a third-party estimate, and Analog Devices should continue to win from this market in the long run. In all, it is easy to see why analysts are upbeat about the company's long-term prospects, anticipating nearly 19% annual earnings growth for the next five years.
Finally, investors looking to add a solid semiconductor stock to their portfolios can buy Analog Devices at just 17 times forward earnings right now. This looks like a good deal, considering its five-year average forward earnings multiple of 20.5, so it would be a prudent move for investors to buy Analog Devices hand over fist right now before it gets more expensive.
