On Monday, Twitter user "Mr Connected" posted a research note from Barclays upgrading shares of chipmaker, Analog Devices (NASDAQ:ADI). Barclays said Analog Devices had "secured multiple sockets across Apple's (NASDAQ:AAPL) iPhone/iPad lineup to enable the 3D/Force Touch feature."
The note says Force Touch should show up in the iPhone starting with the iPhone 6s, and the feature might come to iPads next year. This could be a major win for Analog Devices, according to Barclays.
The Force Touch opportunity
The note says the iPhone should require a single chip from Analog Devices, with larger-screen devices using multiple chips (up to three for a 12-inch device, per the note). Barclays also thinks, over the long term, the multichip solutions "are likely replaced by more advanced, higher [average selling price] single-chip solution."
Further out, the converter chip that helps enable this Force Touch capability could be integrated with 2D touch functionality "into a single super chip," potentially increasing average selling prices for Analog Devices, according to the Barclays note.
Finally, with respect to Apple, the note says the Force Touch opportunity "could drive $0.80+ in incremental [earnings per share]" during calendar 2016. Barclays also believes Analog Devices has an attractive "multi-year roadmap" and could even "suck in other content over time."
The note says Analog Devices is "well positioned beyond [Apple]," citing potential revenue and cost benefits from its acquisition of Hittite Microwave. It also says Analog Devices is "seeing continued strength in the Industrial [market]" and could see an "acceleration in Automotive."
How does the valuation look?
According to data from S&P Capital IQ, analysts expect Analog Devices to generate $3.3 billion in revenue and $2.91 in earnings per share for 2015. Moving into next year, the analyst consensus is for $3.5 billion in revenue (up 5.9%) and $3.23 in earnings per share.
The stock does not look terribly cheap at about 21.6 times expected 2015 earnings and 19.5 times 2016 earnings. However, if this Apple opportunity materializes as Barclays anticipates, then those 2016 earnings estimates could rise significantly.
Barclays says the stock is going to $70
All told, Barclays believes the stock has upside to $70 per share. This would represent an increase of about 11% from current price levels. The average one-year price target for the stock among the analysts who cover it, per the Nasdaq website, is $62 with Barclays being one of the more bullish forecasts.
A note of caution
Analog Devices stock jumped 10% following the publication of the Barclays note and now trades above the consensus analyst price target. If Barclays is correct and Analog Devices indeed won the Apple Force Touch business, then this could lead to further upgrades and upward estimate revisions.
However, if the next iPhone does nort incorporate this Force Touch feature or Analog Devices does not have the design win Barclays thinks it does, then the stock could quickly give up these gains and then some.