Analog Devices (NASDAQ:ADI) Posts Better-Than-Expected Sales In Q1, Guides For Strong Sales Next Quarter

Adam Hejl /
2023/02/15 7:05 am EST
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Manufacturer of analog chips, Analog Devices (NASDAQ:ADI) beat analyst expectations in Q1 FY2023 quarter, with revenue up 21.1% year on year to $3.25 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $3.2 billion at the midpoint, 5.4% above what analysts were expecting. Analog Devices made a GAAP profit of $961.5 million, improving on its profit of $280.1 million, in the same quarter last year.

Is now the time to buy Analog Devices? Access our full analysis of the earnings results here, it's free.

Analog Devices (ADI) Q1 FY2023 Highlights:

  • Revenue: $3.25 billion vs analyst estimates of $3.15 billion (3.15% beat)
  • EPS (non-GAAP): $2.75 vs analyst estimates of $2.60 (5.69% beat)
  • Revenue guidance for Q2 2023 is $3.2 billion at the midpoint, above analyst estimates of $3.04 billion
  • Free cash flow of $1.23 billion, up 45.6% from previous quarter
  • Inventory Days Outstanding: 123, up from 115 previous quarter
  • Gross Margin (GAAP): 65.4%, up from 62.3% same quarter last year

“ADI continues to execute exceptionally well with revenue growth of 21% year-over-year and record earnings per share,” said Vincent Roche, CEO and Chair.

Founded by two MIT graduates, Ray Stata and Matthew Lorber in 1965, Analog Devices (NASDAQ:ADI) is one of the largest providers of high performance analog integrated circuits used mainly in industrial end markets, along with communications, autos, and consumer devices.

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Analog Devices's revenue growth over the last three years has been very strong, averaging 33.2% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $2.68 billion to $3.25 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Analog Devices Total Revenue

This was a decent quarter for Analog Devices as revenues grew 21.1%, topping analyst estimates by 3.15%. This marks 10 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

Analog Devices' appears to be headed for a downturn. While the company is guiding to growth of 7.67% YoY next quarter, analyst consensus sees 4.36% declines over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Analog Devices Inventory Days Outstanding

This quarter, Analog Devices’s inventory days came in at 123, 13 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Analog Devices's Q1 Results

With a market capitalization of $92.4 billion, more than $1.67 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by the very optimistic revenue guidance Analog Devices provided for the next quarter. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see the inventory levels increase. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is up 3.04% on the results and currently trades at $188 per share.

Should you invest in Analog Devices right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.