Analog Devices' (ADI) upbeat remarks around its artificial intelligence data center opportunity are noteworthy, especially coming from a "conservative" management team, Seaport Research Partners said Thursday.
On Wednesday, the semiconductor company projected above-consensus profit and sales for its fiscal fourth quarter, as robust data center and industrial demand for chips drove its third-quarter results above Wall Street estimates.
Analog Devices now estimates that its 2030 data center and energy serviceable addressable market, or SAM, has more than doubled from what the company had envisioned just a year ago, Chief Executive Vincent Roche said on an earnings conference call, according to a FactSet transcript.
"A conservative management team, which took multiple opportunities to point out the realities of the market, is meaningfully raising its forecasts," Seaport Senior Analyst Jay Goldberg said in a note to clients Thursday. "In addition, most of the company's other end-markets are trending upwards, with inventories getting lean and lead times lengthening."
The brokerage upgraded its rating on the Analog Devices stock to buy from neutral with a $425 price target. "Analog companies are notoriously cyclical, but there are now clear signs that (Analog Devices) has entered the growth phase of those cycles," Goldberg wrote.
The company's shares were up 1% in afternoon trade, bringing its year-to-gains to 39%.
There's likely to be 100 gigawatts equivalent infrastructure built for data centers between now and 2031, Roche said on the call, adding that each gigawatt generates $1 billion to $1.5 billion analog SAM.
Although Analog Devices' AI opportunity isn't as big as what Seaport sees for rival Texas Instruments (TXN) and others, it is larger than what the brokerage had expected, according to the note.
"Loosely speaking, (Analog Devices') data center opportunity is strongest at around the edges of the data center -- from the point where electricity reaches the facility to the wall of the data center," Goldberg said. "With the acquisition of Empower, (Analog Devices) now claims their opportunity extends all the way to the rack, which is a significant expansion."
Analog recently completed the acquisition of Empower Semiconductor, expanding its total addressable market, or TAM, and capabilities in AI compute power delivery.
Seaport also took note of that fact that Analog Devices referred to its SAM in assessing its AI opportunity, and not TAM.
"This matters because the difference between SAM and TAM is (that Analog Devices) has products to sell into a SAM, and has to either design or acquire products to convert more of that TAM into the SAM," Goldberg said. "This tells us (Analog Devices') management is being very disciplined in how they talk about this market, a welcome change."
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