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With the extended inventory rebalancing beginning to potentially fade, Analog Devices (ADI +2%) posted sequential growth for the first time in over a year in Q3 (Jul), exceeding analysts' earnings and sales expectations in the process. The signal processing and power management chip maker also projected Q4 (Oct) EPS and revenue consistent with consensus, with the midpoints translating to another quarter of sequential improvements.

Like many of its peers, such as Texas Instruments (TXN) and On Semi (ON), ADI is growing increasingly confident that the worst of the ongoing inventory digestion is behind it. However, it is hesitant to firmly declare a bottom, acknowledging that economic and geopolitical uncertainty could lead to an uneven recovery.

• The inventory adjustments from ADI's core verticals, automotive and industrial, which comprise over three-quarters of annual revenue, were on full display in Q3. Adjusted EPS slid by 36.5% yr/yr to $1.58 on a 24.8% drop in revenue to $2.31 bln. However, on a qtr/qtr basis, ADI delivered earnings and revenue growth of 12.9% and 6.9%, respectively.
• ADI expects this momentum to trickle into its final quarter of FY24, projecting adjusted EPS of $1.53-1.73 and revs of $2.30-2.50 billion. The low end of these forecasts does build in the possibility that conditions weaken over the near term. However, the midpoints of these targets signal solid sequential growth, further illuminating ADI's confidence that it has finally hit the inventory rebalance trough.
• Customer inventory levels have already started to improve, which supports ADI's optimistic outlook. Meanwhile, order momentum is picking up across most of its markets. AI also remains an underlying growth driver as companies continue to allocate additional resources towards bolstering their AI infrastructure and acquiring more power-efficient components, directly benefiting ADI given its focus on developing power-efficient chips.
• However, ADI expressed some caution given the heightened uncertainty across the global landscape limiting the pace of recovery, similar to the warning its peers outlined recently. For example, STMicroelectronics (STM) commented late last month that over the short term, it is enduring a longer and more pronounced inventory correction across the industrial market than what it anticipated. Additionally, TXN mentioned that while it believes the inventory correction is behind it, pockets of weakness persist across industrial and automotive, with some areas seeing further declines.

Nevertheless, with ADI confident it is through the thick of it regarding a challenging inventory cycle, investors are keeping shares trending positively today, mostly shrugging off the cloudy near future as it is consistent with what most of ADI's peers have already touched on. With AI continuing to provide a powerful tailwind, ADI is poised to continue extracting more upside in the long run.