Valuation analysis for Analog Devices, Inc. (NASDAQ:ADI)

When stocks increase due to multiple expansion is sometimes associated with expected future growth, but after a while the rationale starts to dissolve.  Stocks that increase based on multiple expansion while EPS and Revenues decline run the risk of falling back hard.

ADI Analog Devices PE Price Earnings Multiple

Analog Devices, Inc. (NASDAQ:ADI) experienced both earnings and revenue contraction after the first quarter of 2011, that contraction caused the stock to look significantly overvalued, but recently both earnings and revenue seemed to have regained their footing, stabilized, and most recently they have also seemed to be making material improvement.

ADI Analog Devices EPS Earnings

The stock, interestingly enough, did not pause much at all, even in the face of that contraction.  By the third quarter of 2011 the stock started to move higher and it has not looked back.  Although earnings and revenue seem to have made a move into positive territory as of the last result, prior to that there was nothing more than stabilization and the stock was increasing without EPS growth.

Instead, Analog Devices increased based on multiple expansion.  The PE multiple moved from about 10 times earnings, where it was when earnings peaked in 2011, to almost 24 times earnings, earlier this year.  The multiple expansion took place without corresponding earnings growth and as that happened the stock moved higher even though all that was taking place was stabilization.

Technical take:

According to our real time trading report for Analog Devices the stock tested longer term support recently when the market fell and since then the stock has been in the process of increasing towards longer term resistance.  According to our observations the stock is likely to continue to move higher until resistance levels are tested, but it is not a buy at current levels because it is significantly above longer term support.  Instead, actually, we would suggest that investors look to sell the stock when longer-term resistance levels are tested and short Sellers may even be able to participate at that time.


Although Analog Devices has shown some recent improvement in both earnings and revenue the appreciation in the stock price over the past couple of years has been solely due to multiple expansion and that poses serious risks.  Immediately, the stock appears to be relatively overvalued when growth is compared to its current PE multiple, but the multiple expansion observation also opens the door for significant decline in share price solely due to a reversion back to a more fair multiple.  The stock may appreciate slightly beyond current levels given its progression towards longer term resistance, but at that price we would be Sellers and consider opportunities for short selling Analog Devices as well.