Analog Devices, Inc.: A 5G Stock You Likely Haven’t Considered

ADI stockWhy This 5G Stock Could Be Special

Because 5G networks can support data transmission speed up to 100 times faster than 4G—while also substantially reducing latency—they are expected to revolutionize a whole bunch of industries. But, if you are not sure what the best 5G stocks are to take advantage of this growth, you are not alone.

To consumers, the most familiar stocks that can get a boost from the 5G rollout are probably the wireless carriers and smartphone makers. For instance, it’s natural to assume that, in the 5G era, our cell phone bills will go up and the next “iPhone” will be more expensive.

However, these are not the only businesses well-positioned to capitalize on the adoption of 5G technology. Analog Devices, Inc. (NASDAQ:ADI), for instance, is not a particularly well-known stock to consumers, but 5G should turn out to be a major catalyst for it.

Analog Devices, Inc. is a semiconductor company headquartered in Norwood, Massachusetts. Because the company earns most of its revenue by selling products to businesses in the industrial, communications, and automotive industries, its name may not sound familiar to the average consumer. However, in order to make 5G happen, Analog Devices may play a critical role.

Advertisement

You see, there are some major differences between a 4G base station and a 5G base station.

One main difference is that a 5G base station provides five times more spectral efficiency, which is great for the carrier. However, to achieve that increase in capacity on the same spectrum, these base stations are more complex. On average, a 5G base station requires about eight times as many channels compared to a 4G base station. (Source: “ADI Uncovered: 5G Communications,” Analog Devices, Inc., last accessed September 4, 2020.)

And that’s where the opportunity is for Analog Devices.

As the company’s senior vice president, Dr. Greg Henderson, puts it, “Analog Devices participates right in the signal chain that gets multiplied by eight. So we do that radio signal chain from the digital to the antenna. We’re in the part of the content that’s multiplied.” (Source: “Transcript,” Analog Devices, Inc., last accessed September 4, 2020.)

Note that the company also offers integrated solutions that result in a lower cost per channel for its customers. However, because of the large increase in channels, Analog Devices, Inc. is still positioned to make a lot more money from the deployment of 5G base stations.

Dr. Henderson said, “…it’s about a 4x content opportunity increase when you’re looking at 5G versus 4G. And that’s a big part of our growth driver.” (Source: Ibid.)

The neat thing is, investors in ADI stock don’t have to wait for the 5G buildout to earn a return. The company is already running a growing business.

In the third quarter of Analog Devices, Inc.’s fiscal year 2020, which ended August 1, the company generated $1.5 billion in revenue, which represented an 11% increase sequentially.

Adjusted earnings came in at $1.36 per share, up from the $1.08 per share earned in the previous fiscal quarter. (Source: “Analog Devices Reports Third Quarter Fiscal 2020 Results with Revenue and EPS Above the Midpoint of Guidance,” Analog Devices, Inc., August 19, 2020.)

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

Chart courtesy of StockCharts.com

Of course, if you take a look at the stock chart, you’ll see that the company is basically trading at the same level as it did in the beginning of this year. So, where’s the return?

Well, as it turns out, Analog Devices, Inc. has a regular dividend policy.

Right now, the quarterly dividend rate stands at $0.62 per share—that’s a cash return shareholders get to earn regardless of where ADI stock is going.

In the three months ended August 1, 2020, Analog Devices, Inc. paid a whopping $229.0 million in cash dividends.

Analyst Take

Ultimately, we shouldn’t forget that Analog Devices, Inc. is not some start-up. The company has been around since 1965; it already has entrenched positions in multiple end markets, such as industrial, communications, and automotive. It has a diversified product portfolio with approximately 45,000 SKUs. And that’s one of the reasons why, despite the impact from the COVID-19 pandemic, ADI still managed to churn out solid financials. (Source: “Company Overview,” Analog Devices, Inc., last accessed September 4, 2020.)

Add in the company’s potential in 5G and it’s easy to see why ADI stock deserves the attention of growth investors.