Investidea: Analog Devices, because chip isn't cheap

Инвестидея: Analog Devices, потому что chip isn’t cheap

Today we have a speculative idea: take shares of semiconductor device manufacturer Analog Devices (NASDAQ: ADI), in order to make money on the rebound of these shares.

Growth potential and validity: 21% behind 18 months excluding dividends; 10% per annum during 15 years including dividends.

Why stocks can go up: because semiconductors are important to the economy.

How do we act: we take shares now by 148,51 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

ADI manufactures integrated devices: she makes her own chips, tests and assembles them herself, itself produces components for machinery from them. Like Intel.

The company's annual report does not contain information by segments - ADI chips are used in very different areas of high technology: analog and mixed signal, sensors and actuators.

By areas of final application, the company's revenue is divided as follows:

  1. Industry - 55%.
  2. Automotive 17%.
  3. Communications — 16%.
  4. Consumer Sector — 12%.

By type of customer, the company's sales are distributed as follows: intermediary dealers — 63%, direct sales to end users — 36%, other — 1%.


Revenue by country and region:

  1. USA - 32,65%.
  2. Other countries in the Western Hemisphere — 0,58%.
  3. Europe - 21,76%.
  4. Japan - 10,76%.
  5. China - 22,05%.
  6. Other Asian countries - 12,2%.

Инвестидея: Analog Devices, потому что chip isn’t cheap

Arguments in favor of the company

Fell down. I've been waiting a long time for the opportunity to pick up these stocks after the fall., and then she finally introduced herself.: since November, the company's shares have fallen from 188 to 148,51 $, — and that gives us a chance to capitalize on their rebound..

No good reason to fall: the company recently reported better than expected, gave an optimistic forecast for this year and raised dividends. May be, the reason for the relatively high price of the company. But, taking into account all the positive aspects in her business, this fall seems completely unjustified.

Conjuncture. Like Texas Instruments, ADI can count on the growth of orders in the near future, because orders for the production of electronic components in the United States have grown. This clearly indicates, that demand for ADI products will soon grow even more.

And so, as well as Texas Instruments, ADI can look forward to a positive long-term outlook, as the demand for chips will only grow as the complexity of the technological infrastructure becomes more complex.

Инвестидея: Analog Devices, потому что chip isn’t cheap

Logistics. According to the annual report, the company has almost no assets in China. It's good, because, given the zero tolerance policy of the Chinese authorities to the coronavirus, the closure of Chinese ports and industrial agglomerations could seriously spoil the company's reporting.

Dividends. The company pays 3,04 $ per share per year, which gives not the most shameful return in 2,04% per annum. It's not very much, but still more than the average for the hospital: dividend yield S&P 500 is now 1,45% per annum.

It seems to me, given the positive trends in the field of semiconductors, large institutional investors may enter ADI shares. Fortunately, the company's capitalization is too large - 77.72 billion, — so that we can hope for a significant effect from the influx of retail investors. But banks and funds may well take advantage of the recent drawdown of these stocks..

Farther. I think, that in the future the company will begin to divide into parts and issue some of its divisions on the stock exchange as independent issuers - the same Intel is already doing this. This will benefit ADI shareholders: individual issuers can grow very briskly, faster than single ADI.

  maytrade, возвращение :)

What can get in the way

Not cheap. The company is still expensive.: P / S she has 7,4, a P / E — 46,81. So stocks can shake things up.

"And now something completely different". Demand for chips is great, but the pace of this growth will slow down., which in the long term can negatively affect the perception of the company by investors.

Инвестидея: Analog Devices, потому что chip isn’t cheap

Everything else. The cost of raw materials and transportation may adversely affect the company's reporting: more and more companies are suffering from this. And not a fact, that ADI will be able to endlessly factor the growth of its costs into the price of its products: buyers can start to snap and then it will have to reduce prices.

jade storm. If the US imposes technological sanctions against China, then it will hit business and ADI quotes hard, which in China makes a significant part of the revenue. This, Unfortunately, permanent risk, which has to be taken into account.

debts. According to the latest report, the company has debts of almost 13.8 billion, of which 2.221 billion need to be repaid within a year. There is enough money at the disposal of the company to close debts: 1,79 billion in accounts and 1.636 billion in counterparty debts. But its need to invest in fixed asset renewal, combined with considerable debt, could lead to a cut in dividend payments., and they usually take 50% its profits. This could cause ADI shares to fall.

What's the bottom line?

Shares can be taken now by 148,51 $. And then there are the following options for the development of events.:

  1. we are waiting for the growth of shares to 180 $. Think, this is a very real goal for the following 18 Months;
  2. keep shares next 15 years and receive dividends, while ADI is turning into the new Intel or, which is much more likely, split into individual issuers.

Well, you should also look at the news section on the company's website., to have time to dump shares on the "SPb-Exchange" before, how investors will respond to dividend cuts or cancellations. However, specifically now there is no temporary advantage on the "SPb-Exchange" compared to America: the stock exchange started to open very late, depriving us of a temporary advantage. Will hope, that this is a temporary problem.

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