Analog Devices' Push Into High-Margin Businesses: Will it Drive Growth?

Analog Devices’ ADI third-quarter 2025 non-GAAP gross margin came in at 69.2%, expanding 150 basis points. Although the gross margin has been expanding, it didn’t meet the company’s expectation of gross margin being closer to 70%. This has mainly been due to a higher mix of ADI’s low-margin communication business, which increased 17% sequentially.

Although ADI’s sequential growth streak of gross margin broke in the third quarter of 2025, the company is expecting the gross margin to return at a healthy growth rate once the high-margin businesses, including industrial and automotive, rebound. The company expects its fourth-quarter gross margin to return to a 70% level.

ADI’s Industrial segment is experiencing massive growth on the back of demand for its offerings across instrumentation, automation, health care, aerospace and defense and energy management businesses, mainly driven by automatic test equipment, benefiting from AI chip infrastructure buildout and record aerospace & defense performance.

ADI’s automotive segment, which offers products like high-performance signal processing solutions for advanced vehicle systems like infotainment, electrification and autonomous applications, has delivered record revenue growth for the past two quarters, driven by traction in auto connectivity, ADAS, infotainment, and power solutions.

Traction in these high-margin businesses will likely help ADI expand its gross margin beyond the 70% mark in the upcoming quarters.

How Competitors Fare Against Analog Devices

Analog Devices competes with Texas Instruments TXN and STMicroelectronics STM in the Automotive and Industrial segment. Texas Instruments competes with ADI in Analog sensors, power ICs, in-vehicle networking/signal chain, and driver assistance electronics.

STMicroelectronics competes in sensors like MEMS and inertial, analog front ends, interface ICs, and microcontrollers. Both Texas Instruments and STMicroelectronics compete with ADI in the broader scope of the Industrial and communication segment.

Both STMicroelectronics and Texas Instruments compete with ADI in the aerospace and defence business through their radiation-hardened analog and mixed-signal ICs, secure communications, and avionics systems.

ADI’s Price Performance, Valuation and Estimates

Shares of ADI have gained 15.2% year to date compared with the Semiconductor - Analog and Mixed industry’s growth of 13.8%.

From a valuation standpoint, ADI trades at a forward price-to-sales ratio of 9.81X, higher than the industry’s average of 5.41X.

The Zacks Consensus Estimate for ADI’s fiscal 2025 and 2026 earnings implies year-over-year growth of 21.5% and 19.4%, respectively. The consensus estimate for fiscal 2025 and 2026 has been revised upward in the past 30 days.

ADI currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

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