Semi Stocks ADI and MX Grow Despite Tariffs and Geopolitics

The analog/mixed signal semiconductor market as a whole should continue to grow this year, following a very strong 2024. Macro and geopolitical developments, particularly with respect to China given the industry’s dependence on it keep us cautious despite the fact that we are currently in a growth cycle in semiconductors. We think there may be opportunity in Analog Devices ADI and Magnachip Semiconductor MX.
 
The World Semiconductor Trade Statistics (WSTS), which supplies data to the Semiconductor Industry Association (SIA), is projecting 15.4% growth in semiconductors this year, followed by 9.9% growth in 2026. The strength in 2025 will be fueled by a 17.9% increase in IC growth (29% increase in logic, 17.1% in memory, 3.3% in analog and 3.9% in microcontrollers). Sensors, discretes and optoelectronics are expected to grow 7.9%, -0.6% and -1.1%, respectively. Most of the spending will come from the Americas and the Asia Pacific, with Europe strengthening and Japan declining slightly. Data center infrastructure and the emergence of initial AI edge applications drove the 18.9% growth in the first half of the year, with sensors, analog and microcontrollers also contributing to the strength.
 
Many of the players in the analog/mixed signal group have increased their exposure to auto and industrial markets, where design wins have more shelf life. Industrial end market growth prospects are excellent through the next 5-10 years, because of the adoption of new technologies like AI-ML, smart cities, IoT, etc. The auto market is driven by growing electrification and increased use of electronics in cars. Electrification remains a key contributor this year. For both these end markets, China is the main driver, so there is a good amount of uncertainty.

About the Industry

The electronic gadgets we use to accurately read our commands, and record, store, retrieve and process the information we throw at them run on semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog among other things). Most electronic gadgets use a combination of these components, whether in consumer, industrial, auto, medical, communications, or IoT and other markets.

The industry is cyclical and prices are elastic. Players usually serve multiple markets that offset their individual seasonality, or focus on certain core markets for which they have highly differentiated technology and relationships.

Growth Prospects Strong Despite Macro and Geopolitics

• The semiconductor market is expected to post strong growth this year. Gartner estimates that revenue growth will be 12.6% in 2025, with high bandwidth memory (HBM) growing a very strong 66.3%. Growth in 2025 is coming on top of an 18.1% increase in 2024, a year that benefited hugely from AI chips for the data center. Memory grew 71.8% overall, DRAM grew 75.4% and NAND 75.7%. Non-memory revenue (74.8% of total) grew 6.9%. Barring certain segments, end market strength supports these projections.

Gartner estimates that this year, PC market growth will be facilitated by on-device AI (AI PCs will represent 31% of all PC shipments, up from 17% in 2024). AI PCs will make up 31% of total PCs this year, slower than expected earlier because of tariff concerns. By 2026-end, 55% of PCs will be AI PCs and by 2029, they will be the norm. Tariffs are leading to PC inventory buildup in the US, which will be worked down through the rest of the year. Windows 11 refresh is expected to drive demand in the rest of the world. IDC expects the Windows refresh will be a big factor driving the 4.1% increase in sales this year, with tariffs also being a significant factor.

Smartphone shipment growth is expected to increase 1% globally in 2025, with GenAI smartphones making up a 30% share. Premiumization, including slimmer designs, GenAI, foldable form factors and camera features will contribute to a 5% increase in average selling prices.

The auto market, while a smaller consumer of chips, is sluggish at the moment because of U.S. tariff-related uncertainty. Earlier, TechInsights forecasted automotive chip demand growth of 12% in 2025. This story remains because of ongoing trends toward increasing content per vehicle, fueled by electrification, ADAS/autonomy, infotainment, vehicle connectivity, and a move toward the use of domain controllers and zonal architectures, as well as centralized processing. Between 2024 and 2029, we are likely to see auto chip demand CAAGR of 10.8% (including semiconductor-based sensors).

Despite ongoing macro and geopolitical uncertainty, U.S. manufacturing picked up strongly in August, with PMI going from 49.8 in July to 53 during the month, new orders increasing, hiring accelerating, capacity remaining tight and finished goods inventory climbing rapidly, all of which indicate returning strength in the industrial end-market. Some analysts expect a rate cut this month and the Fed is divided on the issue as of now. U.S. Tarriff concerns remain an overhang. Therefore, we are looking for a gradual recovery for this end market.

IoT, cloud, defense, metaverse, digital health, EVs and other innovative transportation, and sustainability considerations are secular drivers.

• In general, semiconductor pricing is robust when capacity is tight and utilization high. However, companies start adding capacity when they anticipate the next big growth cycle which usually continues for several years. AI is the main driver of the current build cycle and significant capacity is being built up today because it will have to suffice for years to come. While new fab construction, often supported by government initiatives, and their equipping is necessary to drive future growth, it brings additional capacity online, which is a negative for near-term pricing. Supply chain efficiency also has an effect on chip prices. Historically, semiconductor supply chains have been very efficient, which led to shortages during COVID restrictions. Supply chains have been broadening and rebalancing since then. The exponential increase in chip demand driven by AI, data center, IoT and EVs and strategic imperatives for countries in the race to technological superiority are greatly expanding demand for chips such that capacity is not expanding fast enough. Therefore, pricing should remain strong in the foreseeable future.

• An emerging issue that semiconductor players are particularly exposed to is geopolitical tensions. The semiconductor supply chain is globally distributed, which means that international relations need to be maintained to ensure that work continues without disruption. While the Russia-Ukraine war didn’t have that much of an impact, the souring of relations between the U.S. and China is another story. If China really tries to take control of Taiwan as many experts expect it will, there could be a terrible war that will be highly disruptive of the global economy and especially of the chip sector. That’s because a leading share of advanced node chips are made on the island. Another geopolitical concern is the increasing awareness among all leading nations of the larger role that semiconductors are playing in AI-driven electronic weaponry and surveillance

Zacks Industry Rank Indicates Strengthening Prospects

The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank of #48, which places it in the top 20% of the nearly 250 Zacks-classified industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates deteriorating near-term prospects.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of Zacks-ranked industries is based on the earnings outlook of the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, we see that although the outlook appears weak for both 2025 and 2026, there is a stabilization and reversal of negative trends since April this year. Overall, the 2025 estimate has dropped 23.8% over the past year, while the 2026 estimate has dropped 26.1%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Stock Market Performance Continues to Lag

The Semiconductor – Analog and Mixed industry currently trades at a discount to both the broader Zacks Computer and Technology sector and the S&P 500 with the gap widening since November last year.

Overall, the industry lost 0.5% of its value over the past year while the broader sector gained 29.8% and the S&P 500 gained 19.8%.

One-Year Price Performance

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Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 28.36X multiple, which is a premium to its median value of 27.11X, as well as the S&P 500’s 22.93X and the broader computer and technology sector’s 27.85X.

The industry has traded between the 24.51X and 29.66X multiples over the past year.

Forward 12 Month Price-to-Earnings (P/E) Ratio

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2 Stocks Worth Buying

Given the growing macro uncertainty, opportunities in the sector are limited. The following stocks are worth a closer look:

Analog Devices, Inc. (ADI): Norwood, Massachusetts-based Analog Devices is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, including amplifies, converters, CODECs, embedded processing products, DSPs, MEMS and temperature sensors, thermal management products, RF/IF components, filters and processors. It has direct sales offices, sales representatives and distributors in more than 50 countries worldwide.

The company is well positioned for the long term with its innovative product development, strong business model, customer engagement, hybrid manufacturing capacity and balance sheet strength. Although economic and geopolitical factors will continue to impact the rate of recovery, the above-expectation results in the last quarter including the order momentum across end markets (particularly industrial) and regions are evidence of the ongoing cyclical recovery. The strategy of maintaining lean distributor inventories while boosting internal inventories appears to be solid because it is likely to improve visibility into the channel as macro conditions, geopolitics, wars and tariffs have introduced a high level of unpredictability into the operating environment.

Analog Devices beat earnings estimates by 6.2% in the fiscal third quarter, with fiscal 2025 (ending October) estimates increasing 29 cents (3.9%) and 2026 estimates increasing 42 cents (4.8%) in the last 30 days. While revenue and earnings for 2025 are expected to increase a respective 14.9% and 20.5%, they’re expected to grow 11.7% and 19.9% in the following year.

ADI shares, ranked #1 (Strong Buy), have appreciated 15.2% in the past year.

Price and Consensus: ADI

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Magnachip Semiconductor Corp. (MX): Cheongju, South Korea-based Magnachip Semiconductor designs and manufactures analog and mixed-signal semiconductor platform solutions for consumer, computing and industrial (including IoT and automotive) electronics OEMs, ODMs and EMS companies, as well as subsystem designers in Korea, the Asia Pacific, the U.S. and Europe. The company sells its products through a direct sales force, as well as through a network of agents and distributors.

Management has decided to focus on the power IC and discrete businesses, as they offer better revenue growth and margin expansion potential. The display business shutdown is more or less complete. It was necessitated because its limited application in the smartphone market was limiting the company’s growth and margin expansion.

The pipeline of next-gen power products, including the Gen 5 and Gen 6 IGBT, Gen 6 SuperJunction MOSFETs and Gen 8 medium- and low-voltage MOSFETs, along with a full array of follow-on power products and 50 new power products to be launched in 2025 (28 of which were launched in the first half) will unlock new high-value opportunities in automotive, industrial, AI and high-current applications up to and greater than 100KW.

Auto, industrial and AI are expected to grow from 51% of the product mix in 2024 to more than 60% in 2028. Revenue generation from new products is expected to start by 2025-end with meaningful contribution expected in the second half of 2026. Design win momentum remains extremely strong at 71 in the last quarter, of which 32 were from new products. The industrial end market alone brought in 47, with computing, communications, consumer and auto making up the rest.

New products, because of the smaller die sizes, will yield 20-30% more die per wafer, thus driving higher revenue per wafer at its Gumi facility, which is optimized for manufacturing these devices. The company is on track to delivering on its 3-3-3 Strategy of $300 million annual revenue run-rate with a 30% gross margin in three years, although these expectations are now subject to macroeconomic factors. Because of tariff uncertainty and pricing pressure on older generation products in China, the 2025 guidance was pared from mid-to-high single digit growth to flattish with the year-ago quarter and gross profit from continuing operations was lowered to 19.5% at the mid-point (previous 19.5%-21.5%).

The company’s earnings beat the Zacks Consensus Estimate by 41.2% in the last quarter. In the last 30 days, the loss estimate for 2025 remains unchanged at 33 cents. The 30-cent loss for 2026 implies a slight improvement from 2025 levels. Analysts expect that in 2025, the company’s top line will decline 19.8% while the bottom line increases 57.1%. For 2026, they are expected to increase a respective 3.9% and 9.1%.

#2 (Buy) ranked Magnachip’s shares are down 33.9% over the past year.

Price and Consensus: MX

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This article originally published on Zacks Investment Research (zacks.com).

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