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Morningstar | Analog Devices Foresees Strong Near-Term Tailwinds in 5G Wireless Infrastructure

Analog Devices is one of the world's largest analog chipmakers, with an especially strong position in analog signal processing chips. We think it is well-positioned to profit from more advanced and higher-priced semiconductor content in automobiles and industrial applications in the years ahead.Analog chips are used to convert real-world signals, such as sound, temperature, and pressure, into digital signals that can be processed. We believe Analog Devices has a wide economic moat because of its proprietary analog designs and high customer switching costs; since analog chips are neither particularly expensive nor do they require cutting-edge manufacturing techniques, high-quality analog chipmakers tend to retain design wins as long as the end product is being built, all while maintaining healthy pricing and strong profitability over time.Most of Analog Devices’ organic sales come from data converters and amplifiers used in various end markets, such as wireless base stations, and the company is expanding into power management chips via its acquisition of Linear Tech. An especially promising end market for the firm continues to be the automotive sector. Not only are traditional cars adding electronic content in their vehicles such as sensors, active safety systems, and advanced infotainment systems, but also hybrid and electric autos are doubling and tripling the amount of chip content inside of each vehicle. We're also seeing a similar trend of increased chip content in industrial applications, where it has tens of thousands of customers. Further, ADI's signal chain semiconductors will likely be prominently used in 5G wireless network equipment. Nonetheless, ADI still faces challenges in a fragmented analog market. The firm has many competitors with equally strong expertise in analog chip designs, and the semiconductor industry is highly cyclical. Regardless of new product releases, Analog Devices' sales probably will continue to ebb and flow with the rest of the sector.