Analog Devices trades at $249.20 per share and has stayed right on track with the overall market, gaining 18.7% over the last six months. At the same time, the S&P 500 has returned 16.8%.
Is there a buying opportunity in Analog Devices, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Analog Devices Not Exciting?
We're sitting this one out for now. Here are three reasons you should be careful with ADI and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Analog Devices’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 10.1% over the last two years. 
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Analog Devices’s operating margin decreased by 7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 24.6%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Analog Devices historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.5%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.
Final Judgment
Analog Devices isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 29.4× forward P/E (or $249.20 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
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