Analog Devices has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 18.2% to $275.75 per share while the index has gained 13.4%.
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Why Is Analog Devices Not Exciting?
We're sitting this one out for now. Here are two reasons there are better opportunities than ADI and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Analog Devices’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.4% over the last two years. 
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Analog Devices historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.9%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.
Final Judgment
Analog Devices isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 28.2× forward P/E (or $275.75 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.
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