Rising Costs And Fragmented Supply Chains Will Erode Margins

Key Takeaways

• Rising supply chain costs, reliance on Asian foundries, and escalating competition threaten margins, pricing power, and long-term revenue growth.
  
• High R&D spending, cyclical customer exposure, and sector volatility could drive earnings instability and constrain future financial recovery.
  
• Secular growth trends, diversified end markets, premium pricing power, resilient operations, and disciplined capital allocation position Analog Devices for stable, long-term value creation.

Catalysts

Engages in the design, manufacture, testing, and marketing of integrated circuits (ICs), software, and subsystems products in the United States, rest of North and South America, Europe, Japan, China, and rest of Asia.

• Erosion of long-term gross and operating margins is likely as escalating geopolitical tensions and continued fragmentation of global supply chains increase costs and disrupt access to critical foundries and customers, directly raising manufacturing, compliance, and operational expenses.
  
• The ongoing and increasing shift of manufacturing and technology leadership towards Asia-particularly as ADI's reliance on external foundry partners grows-could undermine the company's bargaining power, escalate intellectual property risks, and intensify pricing pressures, limiting ADI's ability to pass on costs and depressing net margins.
  
• Persistent and rapidly intensifying competition from lower-cost rivals, the commoditization of analog and mixed-signal components, and the emergence of vertical integration by system and platform companies are expected to erode ADI's market share and suppress pricing power, resulting in stagnant or declining revenue growth over the long term.
  
• Surging R&D and capital expenditure requirements are necessary to keep up with technology advances and tighter environmental regulations, yet these investments risk weighing heavily on free cash flow and lowering net margins if top-line growth continues to moderate or remain cyclically volatile.
  
• Customer concentration in cyclical markets such as automotive and industrial automation creates significant revenue volatility; as these sectors are exposed to macroeconomic and policy headwinds-including tariffs and localization-prolonged downturns or inventory corrections could sharply suppress earnings and impede any sustained recovery in growth.

Analog Devices Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Analog Devices compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Analog Devices's revenue will grow by 10.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 18.7% today to 26.7% in 3 years time.
• The bearish analysts expect earnings to reach $3.5 billion (and earnings per share of $7.39) by about July 2028, up from $1.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 35.0x on those 2028 earnings, down from 62.6x today. This future PE is greater than the current PE for the US Semiconductor industry at 27.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.73%, as per the Simply Wall St company report.

Analog Devices Future Earnings Per Share Growth

Risks

• Persistent secular trends in automation, robotics, proactive healthcare, and AI-driven connectivity are fueling broad-based demand for high-performance analog and mixed-signal solutions, positioning Analog Devices to deliver long-term revenue growth as these trends transcend traditional economic cycles and cyclical downturns.
  
• The company is seeing sustained content expansion in rapidly growing end markets-including automotive (especially EVs and ADAS), industrial automation, healthcare wearables, and data center infrastructure-which diversifies its revenue streams and supports more stable earnings growth in the long term.
  
• Strong innovation and technology differentiation are allowing Analog Devices to command average selling prices significantly above industry averages, supporting robust gross margins and providing pricing power that could defend profitability even in competitive or slowing environments.
  
• Substantial investments in flexible, geographically diversified internal and external manufacturing capacity increase Analog Devices' operational resilience, enabling it to better navigate supply disruptions and geopolitical risks-protecting revenue and market share.
  
• Management is executing disciplined capital deployment, with high free cash flow generation, a commitment to shareholder returns via dividends and buybacks, and targeted R&D investment in future growth markets; this strategy underpins both earnings and long-term shareholder value creation.

Valuation

• The assumed bearish price target for Analog Devices is $186.59, which represents two standard deviations below the consensus price target of $254.16. This valuation is based on what can be assumed as the expectations of Analog Devices's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $155.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $13.1 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 35.0x, assuming you use a discount rate of 9.7%.
• Given the current share price of $231.11, the bearish analyst price target of $186.59 is 23.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.