Analog devices (NASDAQ: ADI) has had a wild run in the stock market in 2021 thanks to the broader tech sell-off, but investors looking to take advantage of fast-growing markets such as connected cars, electric vehicles, 5G technology, and industrial connectivity aren’t should not be bothered by short term volatility.
Analog Devices has experienced robust growth over the past few quarters. More importantly, it’s not going to run out of steam anytime soon, as it contains a bunch of solid catalysts. Let’s take a close look at why the tremendous growth in this tech stock is here to stay and why now is a great time to go long.
Analog Devices pulls the right strings
Analog Devices recently released fiscal second quarter results. Its revenue jumped 26% year-over-year to $ 1.66 billion, while adjusted profit jumped 43% to $ 1.54 per share, thanks to margin gains . Analog’s adjusted gross margin increased 320 basis points to 70.9% in the second quarter compared to the prior year quarter. Adjusted operating margin jumped 370 basis points to 41.7%.
Analog Devices has seen this impressive growth thanks to strong demand. The company’s focus on streamlining its manufacturing operations also helped it cut spending in the quarter. Additionally, Analog Devices expects its gross margin to improve further in the second half of the year, driven by savings resulting from the consolidation of its manufacturing operations.
A robust demand environment in key end markets is expected to ensure consistent revenue growth for Analog. The industrial market, for example, is benefiting from the growing deployment of wireless connectivity. CEO Vincent Roche stressed on the latest results conference call that industrial customers “are looking to add advanced sensing, processing and connectivity to make supply chains more robust, efficient and flexible.”
This is clear from the new design wins that Analog won in the last quarter. The company said a few large industrial machine manufacturers in Europe chose Analog’s Ethernet solutions, while an automation company chose its ultra-high frequency wireless solution to power its robotic systems in an effort to reduce costs and downtime.
Manufacturing activity represented 59% of Analog’s total revenue in the last quarter and grew 36% year-on-year. Recent design wins indicate that it will not run out of steam, while the outlook for the broader market should ensure sustained growth in industrial activity for a long time to come. According to a third-party estimate, the use of connectivity and automation in the industrial market – commonly referred to as Industry 4.0 – is expected to increase rapidly in the coming years, with annual growth of nearly 20% through 2025.
Two more reasons to buy
Analog Devices’ automotive business is built on age-old catalysts through increased vehicle connectivity and growing demand for electric vehicles. The segment produced 16% of the company’s total revenue in the last quarter, registering 42% year-over-year growth as auto production improved from a year ago. Analog Devices experienced particularly strong growth in the electric vehicle (EV) market, where the demand for battery management systems (BMS) more than doubled from the previous year.
The company now provides its BMS solutions to Volvo, as well as two Asian automakers and a European luxury automaker. While the BMS market is expected to register a compound annual growth rate (CAGR) of nearly 20% through 2024, do not be surprised to see Analog Devices maintaining high growth levels in the automotive industry.
The communications sector, however, was a poor performer for Analog in the last quarter. Segment revenue has been flat year-over-year due to muted 5G network deployments so far in 2021. But Analog Devices is bullish on a turnaround as 5G builds are expected to accelerate. the pace in the second half of the year.
The multiple growth engines on which Analog relies are reflected in the exceptional directions of the company. The company expects adjusted earnings of $ 1.61 per share on $ 1.7 billion in revenue this quarter. The adjusted operating margin is expected at 42.5%. These numbers indicate that Analog is anticipating year-over-year growth in high teens this quarter – and it may be able to sustain such growth for a long time to come.
Investors looking to add growth stock to their portfolios have plenty of reasons to be long on Analog Devices, especially since it trades at a reasonable level of 23 times earnings over time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.