Analog Devices Surges Ahead: Strong Earnings and Bright Guidance Propel Stock Upward

Analog Devices Inc. (ADI) recently reported second-quarter earnings and guidance for the third quarter that surpassed analysts' expectations. Morgan Stanley noted that, akin to other companies in the analog chip and MCU sector this earnings season, ADI’s performance was robust.

Morgan Stanley highlighted ADI's second-quarter revenue of $2.64 billion, reflecting an 8.9% sequential growth and a 22.3% year-over-year increase, surpassing both the market’s consensus of $2.511 billion and the bank’s estimate of $2.505 billion. Revenue in automotive, consumer electronics, and communication sectors exceeded expectations, while industrial revenue met predictions. The adjusted gross margin climbed to 69.4%, a mark not achieved since the first quarter of 2024, surpassing the consensus forecast of 68.6% and the bank’s prediction of 69.1%. The adjusted earnings per share (EPS) stood at $1.85, exceeding both the market consensus of $1.69 and the bank’s expectation of $1.70.

For the third quarter, ADI projects revenue to reach $2.75 billion, outpacing the consensus forecast of $2.596 billion and Morgan Stanley’s estimate of $2.601 billion. Adjusted EPS is anticipated at $1.92, once again exceeding the consensus of $1.79 and the bank’s expectation of $1.86.

Notably, ADI has indicated confidence in an upward cyclical trend, driven by strong performances across all end markets and regions. In the industrial sector, shipments and demand are expected to align more closely, overcoming a two-year disparity. This aligns with the bank's view that the robust industrial outlook should compensate for any pre-emptive inventory builds in the automotive sector.

Remarkably, ADI acknowledged preemptive inventory stocking—primarily within the automotive sector—a phenomenon reported for the first time this earnings season in the analog chip industry. This occurrence played a significant role in the company's better-than-expected second-quarter revenue. Morgan Stanley acknowledged ADI’s responsiveness to tariff impacts and emphasized the importance of monitoring the upcoming 90-day tariff hiatus's conclusion.

Morgan Stanley anticipates that operational leverage normalization in the latter half of fiscal 2025 will set a strong foundation for fiscal 2026. With adjusted operating profit margins staying above 40% since second quarter 2024, ADI is projecting 41.5% for the third quarter of fiscal 2025. Factors such as reduced variable compensation pressure and a lower fiscal 2026 revenue comparison base support this trend.

Overall, ADI is perceived as one of the most defensive players in the analog chip and MCU space, due to its distancing from commodity markets, balanced supply-demand management, and solid balance sheet. Morgan Stanley remains bullish, maintaining an "Overweight" rating with a target price of $212. Although ADI’s stock may not be cheaply valued, its stable performance in the face of macroeconomic uncertainties lends credibility to the positive outlook on the analog chip sector.