Analog Devices, Inc.: Will 5G Turn This Old Tech Stock Into a New Growth Play?

ADI stock

This 5G Stock Looks Interesting

In today’s red-hot tech sector, Analog Devices, Inc. (NASDAQ:ADI) doesn’t seem to be an exciting name. The company has been around since 1965, so it’s fairly old by tech-sector standards. Moreover, because Analog Devices generates most of its sales from the industrial, communications, and automotive business-to-business (B2B) markets, most consumers simply haven’t heard about it.

There is, however, a very good reason why investors should pay attention to this Wilmington, MA-based semiconductor company right now: 5G.

Theoretically, 5G networks can transmit data at speeds up to 100 times faster than 4G, while also drastically reducing latency. Whether you are excited about this transition, it’s hard to deny that we are entering the 5G era.

The COVID-19 pandemic might have delayed the 5G rollout in some regions, but one thing is for sure: 5G networks are being deployed around the world. And that has created a major opportunity for Analog Devices, Inc.

Obviously, many companies can do well in the 5G era. However, it’s not easy to quantify the extent to which they will benefit from this transition. Luckily, Analog Devices has given us a clear answer. Going from 4G to 5G will lead to about a four times content opportunity for the company. (Source: “ADI Uncovered: 5G Communications,” Analog Devices, Inc., last accessed August 9, 2021.)

Now, since 5G is mostly regarded as a growth opportunity, the best 5G stocks should deliver improving financials.

On that front, Analog Devices, Inc. does not disappoint.

In the second quarter of the company’s fiscal year 2021, which ended May 1, it generated $1.7 billion of total revenue, representing a 26% increase year-over-year. Notably, Analog Devices earned record revenues in its industrial and automotive markets. (Source: “Analog Devices Reports Record Revenue and Earnings for the Second Quarter Fiscal 2021,” Analog Devices, Inc., May 19, 2021.)

The company’s adjusted earnings came in at $1.54 per share for the quarter. This marks a 43% improvement over the $1.08 per share it reported for the year-ago period.

These numbers exceeded the high end of management’s outlook. Moreover, they also topped Wall Street’s expectations. On average, analysts expected Analog Devices, Inc. to generate revenue of $1.6 billion and adjusted earnings of $1.45 per share.

The business also produced a considerable amount of cash flow, which is not something you often see in the tech world. In the second fiscal quarter, Analog Devices, Inc. generated $677.0 million of free cash flow. Over the trailing 12-month period, the company’s free cash flow totaled over $2.2 billion.

That solid earnings report allowed Analog Devices stock to continue its upward momentum. Take a look at the chart below. Tech stocks had a solid bull run in 2020, but for many tickers, 2021 has been somewhat of a roller-coaster ride.

ADI stock has also made sizable swings to either side this year, but it always managed to bounce back. Over the past 12 months, Analog Devices stock has climbed more than 48%.

Analog Devices, Inc. (NASDAQ:ADI) Stock Chart

Chart courtesy of

Here’s the neat part. While Analog Devices was able to deliver solid growth in its financials, 5G has yet to become a major growth driver for the company.

In Analog Devices’ latest earnings conference call, CFO Prashanth Mahendra-Rajah said that 5G builds “have been muted year-to-date” and that “we anticipate momentum to pick up as 5G deployments broaden globally in the second half of this year, especially in North America now that the C-band auction is complete.” (Source: “ADI.OQ – Q2 2021 Analog Devices Inc Earnings Call,” Analog Devices, Inc., May 19, 2021.)

Simply put, we should see 5G become a stronger catalyst to Analog Devices’ business in the upcoming quarters.

At the time of this writing, the company has yet to report its financial results for the third quarter of its fiscal year 2021. But management did provide guidance earlier on, which consists of $1.7 billion in revenue and $1.61 in adjusted earnings per share at the midpoint.

Considering that Analog Devices, Inc.’s revenue was $1.5 billion and its adjusted earnings were $1.36 per share in the third quarter of its fiscal 2020, management is essentially projecting another quarter of solid year-over-year improvements for both the top and bottom lines.

Analyst Take

Here’s the takeaway: Analog Devices stock is a decades-old tech stock that has done well without having 5G as a big catalyst to its business. But now we are entering a phase of the 5G build-out for which Analog Devices, Inc. is a major participant.

For 5G stock investors, ADI stock is a ticker that should not be ignored.