Investing.com -- Citi expressed a bullish view on the analog chip sector, citing low inventory, margins and earnings that are close to a trough, and an imminent recovery in sales that should drive upside to consensus estimates.
The Wall Street firm maintains a Buy rating on all analog companies within its coverage, highlighting Texas Instruments (NASDAQ:TXN) as the top pick due to its favorable risk-reward ratio.
The analog sector has undergone the second-worst correction in the past two decades, with a 33% drop in sales from peak to trough. However, sales, gross margins, and earnings per share (EPS) are approaching pre-COVID levels, signaling a potential turnaround.
“Gross margins for the analog group have declined over 10% on average, and quarterly EPS estimates have declined roughly 60% on average, almost back to pre-COVID levels,” Citi analysts note.
The sector's recovery is particularly evident in the industrial end market, which accounts for roughly 35% of analog sales. Several companies, including Texas Instruments and Analog Devices (NASDAQ:ADI), are forecasting above-seasonal growth in this segment.
Although sales from the automotive end market are anticipated to decline further, Citi believes that the industrial recovery, along with seasonal trends in the consumer and data center markets, will compensate for the auto weakness.
Citi also believes that Texas Instruments will confirm signs of a broad-based recovery during its first-quarter 2025 earnings call, echoing similar sentiments from Analog Devices. Moreover, Microchip Technology (NASDAQ:MCHP) reported that its bookings in January and February were significantly higher.
Historically, analog sales have jumped by an average of 60% during an upturn, which typically lasts around 10 quarters. Citi's model forecasts a 30% growth in quarterly sales for analog companies from the trough to the second half of 2026.
“We expect upside to our estimates once end demand recovers,” analysts said.
They expect a 70% average growth in EPS by the second half of 2026 for these companies, supported by recent increases in bookings from Texas Instruments, Analog Devices, and Infineon (OTC:IFNNY) Technologies (ETR:IFXGn).
