Up 12% in 2024, you might want to buy these semiconductor stocks before they start a bull run

Analog devices (ADI -2.47%) is not as well known in the semiconductor industry as major players such as Nvidia Or Taiwanese semiconductorsthat are benefiting from the rapidly growing adoption of artificial intelligence (AI) and are seeing stunning growth. That explains why the chipmaker’s shares are up just 12% this year, lagging the stunning gains posted by some of its competitors and the semiconductor sector as a whole.

However, a closer look at the company’s latest quarterly results and management commentary suggests the chipmaker is on the verge of a turnaround. Given its offerings across a variety of end markets, including industrial, automotive, consumer, aerospace, and defense, buying shares of the semiconductor maker now could be a smart move from a long-term perspective.

Analog Devices Struggles But Shows Signs of Recovery

Analog Devices reported its fiscal third-quarter 2024 results (the three months ended Aug. 3) last month. The company’s revenue fell 25% year over year to $2.31 billion, while non-GAAP earnings fell 37% from the same quarter last year to $1.58 per share.

The chipmaker’s weak year-over-year comparisons can be attributed to weak demand in nearly all of its end markets. For example, Industrial is Analog’s largest segment, accounting for 46% of its revenue. It saw a 37% year-over-year revenue decline. That’s not surprising, as the segment is still reeling from oversupply caused by weak demand last year.

Specifically, global semiconductor industry revenues fell 11% in 2024 as demand for smartphones, personal computers, and data centers remained weak. While artificial intelligence has emerged as the savior of the semiconductor industry over the past year, Analog Devices has not been able to capitalize on this trend because it does not produce graphics processing units (GPUs) like Nvidia and AMD.

However, the management emphasizes that the company’s results in the previous quarter were better than expected and the target markets it serves may soon start to recover.

For guidance, Analog Devices is forecasting $2.30 billion to $2.50 billion in revenue for the current quarter, with adjusted earnings of $1.53 to $1.73 per share. The company’s revenue was $2.72 billion in the same quarter last year, so Analog’s year-over-year revenue decline is expected to slow to 11% in the current quarter. The pace of its net income decline should also slow.

These are signs that the inventory correction in Analog Devices’ end markets may be coming to an end. CEO Vincent Roche noted in the latest earnings call that “improving customer inventory levels and order momentum in most of our markets increased my confidence that our second quarter represents a cyclical bottom for ADI.”

Potential recovery could lead to further gains in stock prices

Consensus estimates indicate that Analog Devices’ revenue will decline 24% in fiscal 2024 to $9.38 billion, while earnings are on track to decline to $6.33 per share from $10.09 per share in the previous fiscal year. However, fiscal 2025 should see a rebound with revenue up 10% to $10.35 billion, while its net income could increase nearly 20% to $7.57 per share.

While analysts have moderated their expectations for fiscal 2026, they still forecast acceleration in Analog’s revenue and profit growth, as we can see in the chart below:

Data by YCharts.

These estimates could continue to rise if Analog Devices’ financials improve on the back of a recovery in its end markets, so there’s a good chance the chipmaker could press the gas pedal and deliver more profits in the next few years.