After surging since November, shares of Analog Devices (ADI) have started to pull back. Is this temporary, or should investors expect further declines?
Following years of minimal growth, things are finally picking up for the maker of semiconductors for the automotive and industrial sectors.
Set to see its sales grow by double-digits and its earnings improve substantially in the coming year, the underlying fundamentals remain strong.
Although it may be hard for shares to stage a rebound as the tech sector trends lower, ADI’s reasonable valuation could allow it to hold steady at or near today’s prices (around $150 per share).
Why ADI Stock Has Fallen Off Its Highs
Like other tech stocks, Analog Devices quickly rebounded to pre-COVID-19 levels after the pandemic-driven stock market crash last March. However, it wasn’t until November, when vaccine-related optimism took off, that shares went into hyperdrive.
Rallying from around $119 per share to a high of $164.40 per share between November to February, investors bet that the chip maker would benefit greatly from a post-pandemic economic recovery.
Recent results back up this optimism. In the quarter ending Jan 30, 2020, the company generated $1.56 billion in sales, an increase of around 20% from the prior-year quarter. The bottom line reflected even greater levels of growth, with earnings surging 40% year-over-year to around $1.44 per share.
Nonetheless, while recent results (and guidance) remain solid, ADI stock has sold off. What’s behind this? Chalk it up to the overall decline of the NASDAQ 100 from its all-time highs. That being said, although many NASDAQ 100 components have more room to fall, this stock could stabilize after its recent dip.
Post-Pandemic Recovery Tailwinds May Stabilize Shares
After its recent dip, where is ADI stock headed next? On one hand, given the recent market volatility, one would assume it hasn’t hit a bottom yet, in line with other names in the sector.
On the other hand, unlike some players in the tech space, its valuation really hasn’t gotten out of hand. At a forward price-to-earnings (P/E) ratio of 22.6x, its forward multiple looks reasonable.
Granted, many may see the expected improvement in its results over the coming year as a one-time event. Given how the pandemic affected demand from its end users, it makes sense why ADI’s top and bottom line results are rebounding right now. However, as a sense of normalcy returns, results in 2022 could look less exciting by comparison.
With this in mind, investors could be less willing to give this stock a more premium valuation. But if things turn out as expected over the next few quarters, it may be enough to keep shares steady at today’s price levels.
What Analysts Are Saying About ADI Stock
According to TipRanks, ADI has a Strong Buy consensus rating based on 15 Buys and 2 Holds. With the average analyst price target landing at $179.81, shares could rise 21% in the year ahead. (See Analog Devices stock analysis on TipRanks)
Bottom Line: Analog Devices May Trade Sideways From Here
With it catering to the auto and industrial sectors, Analog Devices has more exposure to recovery tailwinds than the “stay-at-home” tech names that thrived in 2020. However, while it’s set to continue posting rock-solid results in the coming quarters, it may take a while for shares to bounce back to prior highs.
Yet, as the valuation of ADI stock remains reasonable, its recent pullback could be mostly over. Therefore, shares could trade sideways from here, staying at or near $150 per share.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
