Analog Devices (NASDAQ: ADI) has been rocked by rumors of the loss of its spot in Apple's (NASDAQ: AAPL) upcoming iPhone. Its shares have underperformed the NASDAQ 100 Technology Sector index by a fairly wide margin this year (9% gains as compared to the sector's 21% jump) as shareholders' confidence has taken a hit. But savvy investors should look at Analog Devices' weakness as an opportunity in disguise.
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Apple is not a huge component of Analog Devices' overall business, as Cupertino reportedly supplies around 12% of its total revenue. The chipmaker has enough catalysts that could mitigate any potential loss of business from the iPhone maker. This is why investors need to pay close attention to the company's third-quarter earnings report (scheduled for Aug. 30) and take a closer look at the two key trends that could impact its performance going forward.
Industrial growth is a plus
Analog Devices' industrial business accounted for 44% of its total revenue last year, so the segment is crucial to the chipmaker's long-term growth. The good news is that the industrial business's growth has hit a higher gear this year, with revenue increasing 18% in the first six months of 2017.
The company's industrial business has been catalyzed by the acquisition of Linear Technology, which was completed in March. Linear's specialization in making chips for the industrial and automotive markets should be a boon for Analog Devices. The combined technological expertise of the two companies will allow Analog to make a bigger dent in these markets, which could be really big in the long run.
For instance, industrial and automation is one of Analog Devices' subsegments within the industrial business. This division seems set for consistent growth thanks to the growing implementation of real-time analysis of factory processes to reduce waste, increase productivity, and enhance automation. In fact, PricewaterhouseCoopers forecasts that factory automation could increase semiconductor demand by almost 10% a year until 2021.
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Analog Devices' estimates suggest that factory automation could open up a $4 billion revenue opportunity by 2022 on the back of increased semiconductor demand. The company's annualized revenue from this arena currently stands at $500 million, while its total industrial revenue last year stood at just over $1.5 billion.
More importantly, Analog Devices seems well-placed to tap the opportunity in factory automation.
Automotive chips present opportunity
Analog Devices has been supplying automotive chips for quite some time, and gets 15% of its revenue from this space. The company generated $525 million of revenue from this segment in 2014 and is on track to pull in $578 million this year. That's a 10% increase.
But Analog investors will be expecting more from the company's automotive segment given the growth of the market and this is where Analog's Linear Technology acquisition will come into play, as the two companies generated a combined automotive revenue of $900 million last year.
Analog Devices investors can expect the automotive segment to gain more traction as it continues to integrate Linear into its business. More importantly, the acquisition has strengthened Analog's position in the automotive space by increasing its addressable opportunity. The company now believes that its business opportunity from each vehicle will increase to $600 in 2025 as compared to the current chip content worth $250.
Analog Devices' quarterly report and guidance for the rest of the year should make it clear whether the company has been able to retain its chip spot in the next iPhone. But investors shouldn't panic even if it misses out on the iPhone opportunity, because the secular growth opportunities in the automotive and industrial segments should give a nice boost to Analog Devices in the future.
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