Bernstein upgraded Analog Devices (NASDAQ:ADI) to Outperform from Market Perform and raised its price target to $465 from $430 after the semiconductor group delivered stronger-than-expected fiscal third-quarter results and issued an upbeat outlook for the fourth quarter.
Analog Devices reported quarterly revenue of $4.022 billion, ahead of Wall Street expectations of $3.922 billion, while earnings per share reached $3.45 compared with the $3.35 consensus forecast.
Bernstein said the upside was spread across the business, with automotive providing a particularly strong contribution while industrial, consumer and communications revenue also exceeded expectations.
Shares in Analog Devices gained around 1% in U.S. premarket trading following the results.
Fourth-quarter guidance delivers another upside surprise
Bernstein analyst Stacy Rasgon highlighted the company’s fourth-quarter forecast as “another significant beat.”
Analog Devices expects revenue of $4.3 billion and earnings of $3.86 per share, comfortably above Wall Street estimates of $4.085 billion and $3.55, respectively.
Guidance across each major business segment also surpassed consensus forecasts. Industrial revenue is expected to grow by a high-single-digit percentage sequentially, while automotive is projected to expand at a low-single-digit rate.
Communications revenue is forecast to increase 10%, with consumer sales also expected to record high-single-digit sequential growth.
Analog Devices forecasts significant margin expansion
Profitability expectations provided another source of optimism.
Analog Devices guided for a gross margin of approximately 74% in the fourth quarter, an increase of around 150 basis points sequentially and well ahead of the Street estimate of 72.3%.
Rasgon attributed the stronger margin outlook to continued revenue expansion, product mix and pricing.
Operating margin is forecast at approximately 52%, around 200 basis points above Wall Street expectations, reinforcing Bernstein’s view that the company is benefiting from both recovering demand and strong execution.
“ADI results and execution continue to be really solid amid a continued industrial recovery, partially as a function of some of their more idiosyncratic exposures, where growth is solid and they tend to be more differentiated than some of their more catalog-focused competitors, as well as solid channel management,” Rasgon wrote.
Datacenter demand adds another growth driver
Bernstein also pointed to growing momentum within Analog Devices’ datacenter operations as an increasingly important contributor.
The business is helping strengthen the communications segment while supporting higher profitability across the company.
Rasgon said datacenter demand is “driving the Comm segment in particular into a growth trajectory that increasingly appears sustainable,” while also providing support for gross and operating margins.
That diversification could become increasingly important as investors assess whether the current industrial recovery can continue after exceptionally strong recent growth.
Bernstein sees improving valuation case for Analog Devices
Valuation had previously prevented Bernstein from adopting a more bullish position on the shares, despite the company’s operational performance.
The brokerage now estimates that Analog Devices is trading at a multiple in the “low 20s” based on its revised fiscal 2027 earnings forecast. Bernstein also believes earnings of $20 per share by fiscal 2028 look “quite plausible.”
Rasgon acknowledged concerns that industrial growth, currently above 50% year on year, could be approaching a peak and that some of the benefits from improving capacity utilisation may diminish.
Nevertheless, he said he is “growing more positive on the overall growth trajectory” and believes the company’s valuation may no longer adequately reflect its earnings potential.
The combination of a third-quarter beat, stronger fourth-quarter guidance, improving margins and expanding datacenter exposure ultimately shifted Bernstein’s assessment of the risk-reward profile sufficiently to justify the upgrade to Outperform.
Analog Devices stock price
