This Analyst Is Selling Analog Devices On Valuation

Goldman Sachs’ Toshiya Hari pointed out that Analog Devices, Inc. ADI was already operating close to its long term margin targets and that there could be a possibility of the stock being de-rated.

Hari initiated coverage of the company with a Sell rating and price target of $50.

Limited Upside

“We see limited upside to the company’s long-term margin targets and expect multiples to re-rate as investors better appreciate the company’s “peaked-out” margin structure,” the analyst mentioned.

Margin expansion is among the key drivers of analog outperformance and Analog Devices already close it peak levels, with only an incremental 100 bps remaining between the operating margin reported for 2015 and the company’s long term targets.

The Apple Effect

Hari pointed out that Analog Devices has been re-rated down in the past, whenever Apple Inc. AAPL ramped its business, due to investor concerns regarding volatility in the earnings stream.

“While this dynamic is relatively well appreciated, in our view, we think the market is discounting the anticipated increase in AAPL business over the coming years,” Hari stated.

The analyst expects consumer revenue to increase from 10.3 percent of total recent during the most recent quarter to 20.5 percent by the end of 2018.

Hari also noted that “the Street is assigning too much sales value to the AAPL business given ADI supplies only one socket for the company, the force touch controller in iPhones.”