The analog/mixed signal semiconductor market as a whole should continue to grow this year, following a very strong 2024. Macro and geopolitical developments, particularly with respect to China given the industry’s dependence on it keep us cautious despite the fact that we are currently in a growth cycle in semiconductors. We think there may be opportunity in Semtech Corp. (SMTC Quick QuoteSMTC - Free Report) and Analog Devices (ADI Quick QuoteADI - Free Report) .
 
The World Semiconductor Trade Statistics (WSTS), which supplies data to the Semiconductor Industry Association (SIA), is projecting 11.2% growth in semiconductors this year on the back of a 13.4% increase in IC growth (23.9% increase in logic, 11.7% in memory, 2.6% in analog and a 1% decline in microcontrollers). Sensors, discretes and optoelectronics are expected to grow 4.5%, 2.6% and -4.4%, respectively.

The fastest growth is expected to come from the Americas at 18%, followed by the Asia Pacific region at 9.8%, Europe at 3.4% and Japan at 0.6%. Artificial intelligence (AI), cloud infrastructure and advanced consumer electronics are expected to be the primary drivers.
 
Many of the players in the analog/mixed signal group have increased their exposure to auto and industrial markets, where design wins have more shelf life. Industrial end market growth prospects are excellent through the next 5-10 years, because of the adoption of new technologies like AI-ML, smart cities, IoT, etc.

The auto market is driven by growing electrification and increased use of electronics in cars. Electrification remains a key contributor this year. For both these end markets, China is the main driver, so there is a good amount of uncertainty.

About the Industry

The electronic gadgets we use to accurately read our commands, and record, store, retrieve and process the information we throw at them run on semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog among other things). Most electronic gadgets use a combination of these components, whether in consumer, industrial, auto, medical, communications, or IoT and other markets.

The industry is cyclical and prices are elastic. Players usually serve multiple markets that offset their individual seasonality, or focus on certain core markets for which they have highly differentiated technology and relationships.

Growth Prospects Tempered by Macro and Geopolitics

The semiconductor market is expected to poststrong growth this year. Gartner estimates that revenue growth will be 13.7-14% in 2025, with high bandwidth memory (HBM) growing a very strong 66.3%. Growth in 2025 is coming on top of an 18.1% increase in 2024, a year that benefited hugely from AI chips for the data center. Memory grew 71.8% overall, DRAM grew 75.4% and NAND 75.7%. Barring certain segments, end market strength supports these projections.

Gartner estimates that this year, PC market growth will be facilitated by on-device AI (AI PCs will represent 43% of all PC shipments by 2025, up from 17% in 2024). IDC expects the Windows 10 refresh and on-device AI to remain the biggest drivers with U.S. tariffs and associated inflation as well as the possibility of a global recession being offsetting factors.

Smartphone growth is expected to be 2.3% globally and 3.3% in the U.S., according to IDC, as subsidies by the Chinese government and strength in emerging markets like India and Indonesia are offset by U.S. tariffs.

The auto market, while a smaller consumer of chips, is sluggish at the moment because EV uptake in Europe and the U.S. has slowed, making China the main driver this year. Overall, TechInsights forecasts automotive chip demand growth of 12% in 2025, driven by increased content per vehicle. Overall production is expected to remain slow aside from India and Thailand. Between 2024 and 2028, auto chip demand and revenue are expected to grow at an average CAGR of 11.8% and 12.4%, respectively.

AI is likely to remain a big driver this year. According to Gartner, AI chips will grow 33% this year with 47% of total AI chip revenue coming from the PC market. By 2026-end, all enterprise PC purchases will be AI PCs. Only 5% of companies were using generative AI in 2023, which will grow to 80% by 2026.

Macro and geopolitical uncertainty are hurting demand in the industrial end-market. The still-high interest rate in the U.S. is leading to lower investment at manufacturing companies and depressing employment numbers. U.S. Tarriff concerns are increasing uncertainties, leading to a drop in new orders, production cuts, destaffing, higher prices and inventory buildup.

Both ISM and S&P Global are reporting the sharpest PMI contraction in March 2025. There is nothing to suggest that interest rates will come down significantly or that tariff-related uncertainty will disappear any time soon. Therefore, this year is likely to remain weak for this end market, with the possibility of improvement next year, if interest rates and tariffs normalize.

IoT, cloud, defense, metaverse, digital health, EVs and other innovative transportation, and sustainability considerations are secular drivers.

In general, semiconductor pricing is robust when capacity is tight and utilization high. However, companies start adding capacity when they anticipate the next big growth cycle which usually continues for several years. AI is the main driver of the current build cycle, and significant capacity is being built up today because it will have to suffice for years to come.

While new fab construction, often supported by government initiatives, and their equipping is necessary to drive future growth, it brings additional capacity online, which is a negative for near-term pricing. Supply chain efficiency also has an effect on chip prices.

Historically, semiconductor supply chains have been very efficient, which led to shortages during COVID restrictions. Supply chains have been broadening and rebalancing since then. The exponential increase in chip demand driven by AI, data center, IoT and EVs and strategic imperatives for countries in the race to technological superiority are greatly expanding demand for chips such that capacity is not expanding fast enough. Therefore, pricing should remain strong in the foreseeable future.

An emerging issue that semiconductor players are particularly exposed to is geopolitical tensions. The semiconductor supply chain is globally distributed, which means that international relations need to be maintained to ensure that work continues without disruption.

While the Russia-Ukraine war didn’t have that much of an impact, the souring of relations between the U.S. and China is another story. If China really tries to take control of Taiwan as many experts expect it will, there could be a terrible war that will be highly disruptive of the global economy and especially of the chip sector. That’s because a leading share of advanced node chips are made on the island. Another geopolitical concern is the increasing awareness among all leading nations of the larger role that semiconductors are playing in AI-driven electronic weaponry and surveillance mechanisms.

Zacks Industry Rank Indicates Deteriorating Prospects

The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank of #149, which places it in the bottom 39% of the nearly 250 Zacks-classified industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates deteriorating near-term prospects.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of Zacks-ranked industries is based on the earnings outlook of the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions over the past year, we see that analyst opinion about the outlook for both 2025 and 2026 has materially deteriorated, and particularly since November 2024. Overall, the 2025 estimate has dropped 32.3% over the past year, while the 2026 estimate has dropped 32.2%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Stock Market Performance Continues to Lag

The Semiconductor – Analog and Mixed industry currently trades at a discount to both the broader Zacks Computer and Technology sector and the S&P 500 with the gap widening since November last year.

Overall, the industry lost 15.1% of its value over the past year while the broader sector gained 6.4% and the S&P 500 gained 9.3%.

One-Year Price Performance

Image Source: Zacks Investment Research

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 28.21X multiple, which is a premium to its median value of 27.75X, as well as the S&P 500’s 21.86X and the broader computer and technology sector’s 26.06X.

The industry has traded between the 24.5X and 29.53X multiples over the past year.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Image Source: Zacks Investment Research

2 Stocks Worth Buying

Given the growing macro uncertainty, opportunities in the sector are limited. The following stocks are worth a closer look:

Semtech Corp. (SMTC Quick QuoteSMTC - Free Report) : Camarillo, California-based Semtech designs, manufactures and markets a broad range of analog and mixed- signal semiconductors for computer, communications, industrial, military-aerospace and automotive markets.

The company caters to attractive markets where demand for faster, more energy efficient and more sophisticated technology is a constant. Since it also has close technical collaborations with industry players, uptake of its products is secure. Management has three core priorities for the current year, including portfolio optimization and simplification, strategic investment in R&D, and margin expansion, which along with continued debt reduction should generate attractive returns for investors.

Semtech matched earnings estimates in the first quarter of fiscal 2026 (ending January). The Zacks Consensus Estimate for 2026 is down 4 cents (2.4%) in the last 60 days with the 2027 estimate dropping 9 cents (4.2%) in the same period. Revenue and earnings are expected to increase a respective 14.2% and 88.6% in 2026 and a respective 10.4% and 24.5% the following year.

SMTC shares, ranked #2 (Buy), have gained 27.3% in the past year.

Price and Consensus: SMTC

Image Source: Zacks Investment Research

 

Analog Devices, Inc. (ADI Quick QuoteADI - Free Report) : Norwood, Massachusetts-based Analog Devices is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, including amplifies, converters, CODECs, embedded processing products, DSPs, MEMS and temperature sensors, thermal management products, RF/IF components, filters and processors. It has direct sales offices, sales representatives and distributors in more than 50 countries worldwide.

The company is well positioned for the long term with its innovative product development, strong business model, customer engagement, hybrid manufacturing capacity and balance sheet strength. Although economic and geopolitical factors will continue to impact the rate of recovery, the above-expectation results in the last quarter including the order momentum across end markets and regions are evidence of the ongoing cyclical recovery. The strategy of maintaining lean distributor inventories while boosting internal inventories appears to be solid, because it is likely to improve visibility into the channel as macro conditions, geopolitics, wars and tariffs have introduced a high level of unpredictability into the operating environment.

Analog Devices beat earnings estimates by 9.5% in the fiscal second quarter, with fiscal 2025 (ending October) estimates increasing 26 cents (3.9%) and 2026 estimates increasing 18 cents (2%) in the last 30 days. While revenue and earnings for 2025 are expected to increase a respective 12.5% and 15.8%, they’re expected to grow 9.9% and 18.8% in the following year.

ADI shares, ranked #3 (Hold), have lost 3.2% of its value in the past year.

Price and Consensus: ADI

Image Source: Zacks Investment Research