At first glance, Analog Devices, Inc. (NASDAQ:ADI) may not seem like the typical 5G stock. The company has been around for more than five decades, it doesn’t make any smartphones, and it doesn’t own or operate any communications infrastructure.
And yet, ADI stock is well positioned to benefit from the increasing adoption of 5G technology.
You see, Analog Devices is a semiconductor company that makes most of its money from selling products to businesses in the industrial, communications, and automotive industries.
The company’s products are widely used at base stations, which are critical components of a mobile telecommunications network.
And because a 5G base station requires about eight times as many channels compared to a 4G base station, the technology could translate to a four-time increase in content opportunity for Analog Devices. (Source: “5G Communications,” Analog Devices, Inc., last accessed November 19, 2020.)
Of course, because of the COVID-19 pandemic, the deployment of 5G networks has been delayed in many regions. But as it turns out, 5G has already become a catalyst for the company.
In the third quarter of Analog Devices’ fiscal year 2020, which ended August 1, revenue from its communications segment surged 14% year-over-year. (Source: “ADI.OQ – Q3 2020 Analog Devices Inc Earnings Call,” Analog Devices, Inc., August 19, 2020.)
Management pointed out that growth in this segment was largely due to the company’s leadership position in 5G wireless systems and strong positions in optical connectivity used in carrier networks and data centers.
The neat thing about 5G is that it’s going to be more than just a one-time catalyst. According to Analog Devices’ president and chief executive officer, Vincent T. Roche, the patterns of 5G deployment are very similar to that of previous generations of wireless network technology.
“…if you look at 4G, specifically, just to give you a bit of perspective here, we grew, albeit a very, very lumpy business, as we always say, but we grew over the entire era of its build out by mid-single digits,” said Roche.
“We had more content than we had in the prior generations. We took more share. And we’re actually even better positioned in 5G because it’s a more complex radio problem fundamentally.” (Source: Ibid.)
In other words, as the adoption of 5G continues to increase around the world over the next few years, Analog Devices, Inc. will likely be able to consistently grow its communications business.
Of course, communications is only one segment of Analog Devices—it represents about 25% of the company’s total revenue. So investors might be wondering how the other segments are doing during this pandemic era.
Well, the good news is, even in this challenging economic climate, Analog Devices’ company-level financials have remained resilient.
In the company’s 2020 third fiscal quarter, it generated $1.5 billion in total revenue, which was down just 1.6% year-over-year. (Source: “Analog Devices Reports Third Quarter Fiscal 2020 Results with Revenue and EPS Above the Midpoint of Guidance,” Analog Devices, Inc., August 19, 2020.)
And if you look at a quarter-over-quarter comparison, you’ll see that the top-line number is actually up 11% sequentially.
As I mentioned earlier, the company’s communications segment was the highlight. However, the industrial segment—which is by far the largest segment of the company—also grew its business, with revenue rising three percent year-over-year to $774.4 million in the third fiscal quarter.
The automotive and consumer segments, on the other hand, experienced double-digit percentage revenue declines compared to a year ago.
At the bottom line, Analog Devices’ adjusted earnings came in at $1.36 per share, which was actually up eight percent from the $1.26 per share earned in the year-ago period.
Analog Devices, Inc. (NASDAQ:ADI) Stock Chart
Chart courtesy of StockCharts.com
If you’ve been following my writing, you’d know that, as someone with a long-term investment horizon, I tend to focus on fundamentals a lot more than technical analysis.
But right now, the breakout in Analog Devices stock—as you can see in the above chart—is hard to ignore.
For most of the last six months, ADI stock was in a trading range with well-defined support and resistance levels. After the U.S. presidential election, though, it swiftly broke above the previous resistance level and reached an all-time high of $140.38 on November 9.
Of course, after a major breakout, the previous resistance becomes a support level and the stock may retrace to test that level. However, given the strong underlying business of Analog Devices, Inc., we could be looking at the beginning of a new era for this 5G stock.