Stock of analog devices (NASDAQ: ADI) is up nearly 20% since the start of this year, and at the current price of $ 171 per share, we believe Analog Devices stock has potential downside of around 15%.
Why is that? Our belief stems from the fact that ADI stock has risen 2 times since late 2018, and after releasing mixed numbers for Q2 2021, we believe ADI stock may go down. Our dashboard What factors have caused a 99% variation in the stock of analog devices between 2018 and now? provides the key figures that underpin our thinking, and we explain more below.
Analog Devices is a semiconductor company that manufactures products used in various applications such as signal processing and power management. ADI’s price increase since 2018 has come despite revenue that was roughly unchanged between fiscal 2018 and the last four quarters. However, net margins fell from 24.2% to 25.2% during this period, and combined with a marginal 1% decline in the number of shares outstanding, EPS (earnings per share) fell from $ 4.05 in fiscal 2018 to $ 4.24 on an LTM basis.
Additionally, ADI’s P / E (price / earnings) ratio fell from 21x in 2018 to 47x at the end of 2020, but has since fallen to 40x currently. We believe that given the mixed performance of Analog Devices in Q2 ’21, there is a possible downside risk for the P / E multiple.
So what is the likely trigger and timing of this downside?
The global spread of the coronavirus has resulted in lower demand for computer and hardware peripherals in all markets, resulting in lower demand for semiconductors and lower demand for Analog Devices products. Analog Devices’s fourth quarter 2020 results confirmed this, with revenue falling to $ 5.6 billion from $ 6 billion in 2019. Additionally, with lower cost of sales and expenses Operating margin, operating margins fell to 26.7% from 28.5% in 2019. This weighed on EPS, bringing it down to $ 3.31 from $ 3.68 in 2019.
However, demand has since accelerated and second quarter 2021 results saw revenue of $ 1.66 billion, up from $ 1.32 billion in the second quarter of 2020. The company was able to control its operating expenses, which allowed EPS to drop from $ 0.73 to $ 1.15.
However, it’s important to note that fiscal 2020 revenue (at $ 5.6 billion) was still lower than fiscal 2018, which stood at $ 6.2 billion. Despite increasing demand and year-over-year revenue in Q2 2021, given the overall revenue and profit trend of Analog Devices since fiscal 2018, we believe the company does not justify a multiple P / E also high. While Analog Devices’ earnings for fiscal 2021 (expected at the end of this year) will paint a clearer picture, we believe that in the near term, the stock will see its P / E multiple decline from the current level of 40x to 32x, which despite being supported by a slight increase in revenues and margins could cause the share price to drop to as low as $ 145, a 15% downside from the current price of nearly $ 171 .
While Analog Devices’ stock may go down, it helps to know how its peers stack up. Comparison of analog device stocks with peers summarizes how Analog Devices compares to its peers on important metrics. You can find other useful comparisons at Peer comparisons.