Analog Devices Faces Inventory Headwinds and Mixed Reviews from Top Analysts

Raymond James analyst Melissa Fairbanks reiterated an Outperform on Analog Devices, Inc ADI with a price target of $200.

The 2Q results and guide reflect the ongoing inventory correction impacting the broader analog industry, with particular weakness in China EV presenting a more significant headwind to ADI (as compared to peers). 

The company continues to under-ship actual sell-through, working to mitigate any further inventory overhang, driving another meaningful step down in the October quarter, while an extra week in January will support flattish trends, at least optically. 

Most importantly, there is expected margin performance even as revenue declines – gross margin staying around 70% for FY24, with operating margin solidly above 40% – proof of a sustainably more profitable business model.

Needham analyst N. Quinn Bolton maintained a Hold rating.

ADI reported 3Q results slightly below the midpoint of guidance and guided 4Q down 12% Q/Q, well below consensus. 

Inventory digestion is accelerating across all end markets, especially Industrial and Comms.

ADI shipped below end-market consumption in 3Q and will again in 4Q.

Over 85% of product lead times are within 13 weeks, exacerbating customer order reductions. 

The extra week in Q1 will offset typical seasonality. He cut his FY23 and FY24 adjusted EPS estimates to $10.08 from $10.47 and $8.10 from $9.30, respectively. He did not find the valuation compelling and will await a better entry point. 

Oppenheimer analyst Rick Schafer reiterated an Outperform and a $215 price target. 

ADI delivered soft results and outlook. The 4Q sales outlook is 10% below Street, marking ADI's 2nd consecutive quarterly cut this semi-correction cycle. 

Peers like Texas Instruments Inc TXN began seeing correction in the second half of FY22. 

He believes normalizing lead times drives much of customers' softer demand/inventory excess. 

He believes ADI is 2 -3 quarters away from positive book-to-bill. The 3Q gross margin of 72.2% declined ~150bps Q/Q on mix/utilization. 

The margin will likely hold at >70% in FY24. 

Hybrid manufacturing is a shock absorber, helping sustain margins. Auto, Industrial, and 5G lead to long-term growth.

Price Action: ADI shares traded lower by 2.17% at $173.63 on the last check Thursday.