Analog Devices, Inc.: A Top 5G Stock for 2021 & Beyond

Under-the-Radar Stock to Profit from the 5G Era

Investors like 5G stocks partly because many of them are names that we’re familiar with, such as Apple Inc (NASDAQ:AAPL) and Verizon Communications Inc. (NYSE:VZ). It’s quite obvious that 5G is boosting the business of these companies: the latest “iPhone” is more expensive than before, and our cell phone bills keep going up.

However, there are also 5G stocks that aren’t known for serving retail customers like you and me. They don’t make headlines as often as Apple and Verizon, but they could still benefit from the 5G era.

Check out Analog Devices, Inc. (NASDAQ:ADI), for instance. The Wilmington, MA-based semiconductor company has been around for more than five decades. But because 90% of its sales come from the industrial, communications, and automotive business-to-business (B2B) markets, it’s not exactly a familiar name to most consumers.

As it turns out, ADI stock could be a great 5G stock. The reason lies in the difference between 4G and 5G base stations.

You see, Analog Devices’ solutions are widely used at base stations. And a 5G base station happens to require a lot more channels—about eight times more—than its 4G counterpart. As a result, 5G deployment has created a major content opportunity for the company. (Source: “ADI Uncovered: 5G Communications (Presentation),” Analog Devices, Inc., last accessed March 15, 2021.)

Note that, because the company offers integrated solutions that lead to a lower cost per channel, it’s not getting eight times the revenue per channel. But there’s still a dollar increase due to the much larger number of channels.

How big is that increase?

Well, according to Analog Devices’ senior vice president, Dr. Greg Henderson, the transition from 4G to 5G provides “about a 4x content opportunity increase.” (Source: “ADI Uncovered: 5G Communications (Transcript),” Analog Devices, Inc., last accessed March 15, 2021.)

Now, we know that the deployment of 5G networks has been delayed in many regions due to the COVID-19 pandemic, but that hasn’t prevented Analog Devices from growing its business.

According to Analog Devices’ latest earnings report, the company generated $1.6 billion of revenue in the first quarter of its fiscal 2021, which ended January 30. The amount represented a 20% increase year-over-year. (Source: “Analog Devices Reports First Quarter Fiscal 2021 Results at the High End of Guidance,” Analog Devices, Inc., February 17, 2021.)

Notably, all three of Analog Devices’ B2B markets delivered double-digit-percentage revenue growth from a year earlier.

The business also gushes a healthy amount of cash flow. In the reporting quarter, Analog Devices generated $361.0 million in free cash flow, which represented 23% of its total revenue.

For the bottom line, the company reported adjusted diluted earnings of $1.44 per share for the quarter, marking a 40% increase from the $1.03 per share it earned in the year-ago period.

Regarding 5G, the company believes the U.S. deployment of 5G networks will be “a second half event,” and they have seen some slowdown in China. Therefore, regarding Analog Devices’ communications segment, management’s outlook is that the business “troughs in [the] second quarter and then begins to pick up in the second half with the global 5G.” (Source: “ADI.OQ – Q1 2021 Analog Devices Inc Earnings Call,” Analog Devices, Inc., February 17, 2021.)

While 5G is not expected to be much of a catalyst in the second quarter for Analog Devices’ communications market, the company’s overall business should continue to prosper.

Management expects the company to generate $1.6 billion of revenue and $1.44 per share in adjusted earnings in its second fiscal quarter. In other words, both the top- and bottom-line numbers are forecast to be above their first-quarter levels.

Analog Devices, Inc. (NASDAQ:ADI) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

As you can see from the above chart, even though Analog Devices stock is not as well known as other 5G stocks, it has delivered some serious returns to investors. Over the past year, shares of Analog Devices, Inc. are up more than 50%.

And as 5G deployment picks up in the coming years, more returns from ADI stock could be on the way.