This 61-Year-Old Tech Stock Silently Became an AI Superstar

The artificial intelligence (AI) building boom is far more than just chips. Data centers need to store those chips, and each of those facilities has requirements centering around power, liquid cooling, and other components.

Analog Devices (NASDAQ: ADI) specializes in energy management hardware that connects power to data centers. The company's hardware also safely distributes electricity to multiple servers to avoid overheating.

This positioning has helped the 61-year-old company become a hot AI stock, and recent fundamentals suggest that momentum will continue.

Image source: Getty Images.

A record outlook highlights AI gains

Analog Devices reported robust fiscal 2026 third-quarter results (ended Aug. 1). Revenue soared by 40% year over year, with the Data Center and Industrial segment fueling most of that growth. Chief Executive Officer Vincent Roche cited "deep customer collaboration" and rising demand when discussing results.

However, the most bullish indicator came when the company announced guidance for its fiscal fourth quarter. A midpoint of $4.3 billion in revenue implies another quarter of 40% year-over-year revenue growth.

Analog Devices acts as an intermediary for the two hottest parts of the AI boom: chips and power. That suggests revenue growth will continue beyond fiscal 2026, especially when considering the projections for the AI industry. According to Grand View Research, the AI market is expected to achieve a 31% compound annual growth rate through 2033.

AI growth without the capex issues

The company is primed for the AI boom, but it doesn't face the same capital expenditure (capex) issues that plague hyperscalers. Tech giants are committing billions of dollars toward chips, data center storage, and other components.

Neoclouds like Nebius have been raising substantial capital to build AI data centers to keep up with demand. These efforts can produce parabolic revenue growth, but they also require a lot of up-front capital and debt.

Analog Devices doesn't face soaring expenses. The company returned $1.7 billion to shareholders through dividends and share repurchases in its third quarter. Net income more than doubled year over year, reaching $1.34 billion. That resulted in a 33% net profit margin.

The trend of rising profit margins should continue. Net operating expenses only rose about 13% year over year in its third quarter, reaching $1.09 billion. Its net operating expense came to $3.2 billion for the first nine months of its fiscal 2026, which is also only a 13% year-over-year increase.

The company's analog chip production is more basic than graphics processing units (GPUs) and memory chips. Equipment that was made a decade ago can still produce analog chips, while equipment for GPUs and memory chips must be constantly updated and modernized, which results in much higher capex.

The valuation is promising

Analog Devices' operating expense should rise at a relatively modest rate while sales surge. That implies wider profit margins in the future, but even with this forecast, the growth stock still manages to trade at an attractive valuation.

It's valued at only a 22.5 forward price-to-earnings ratio (P/E), and its 0.56 price/earnings-to-growth ratio (PEG) also hints at an undervalued price point. The company's valuations were much higher just a quarter ago.

The analog chips trade doesn't have as much attention as memory chips and GPUs. While those two industries are growing faster than analog, companies like Analog Devices don't have to worry about making soaring capital expenditures.

The company already has announced that its profits will continue to outpace revenue growth. Its forecast for the fourth quarter implies $3.86 in adjusted earnings per share (EPS) at the midpoint. Management reported $2.26 adjusted EPS in its fiscal 2025 fourth quarter, so the midpoint projection represents a 71% year-over-year increase.

Don't expect Analog Devices to post skyrocketing revenue numbers like Micron. However, it doesn't have to reach those lofty standards to meaningfully expand profit margins and outpace the S&P 500.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.