ADI's Communications Segment Surges on AI Demand: What's Ahead?

Analog Devices’ ADI Communications end market is gaining from the massive growth of AI data center infrastructure. In fiscal third-quarter 2026, Communications revenues reached $655 million, up 18% sequentially and 84% year over year. The segment accounted for approximately 16% of ADI’s total quarterly revenues.

The key growth engine is Data Center, which now represents 80% of ADI’s Communications revenue. Data Center sales grew more than 100% year over year in both optical and power, highlighting the increasing analog content required as AI systems become more power- and information-intensive. Wireless also contributed, with revenues increasing more than 25% year over year on cyclical recovery.

ADI’s optical portfolio is benefiting from the transition toward higher-speed networking. Customers are seeking to increase optical lanes and bandwidth as networks move from 800 gigabits toward 3.2 terabits per second. The company expects to benefit from unit growth in pluggable and coherent optical modules, higher bill-of-materials content and potential market-share gains. Meanwhile, optical circuit switching revenues are expected to approximately double in fiscal 2026, with similar growth targeted for fiscal 2027.

The completed Empower Semiconductor acquisition adds integrated voltage regulation and high-density power technology. Optical circuit switching revenues are expected to roughly double in fiscal 2026 and target similar growth in fiscal 2027, expanding ADI’s content across the grid-to-chip architecture. Power is another important opportunity as AI racks demand greater efficiency and power density.

ADI is seeing increased design activity around 800-volt DC distribution, intermediate power conversion and processor-level power delivery. These factors are likely to support ADI’s long-term growth. However, the company faces competition from other established players in the AI connectivity space.

How Competitors Fare Against ADI

ADI faces stiff competition from Marvell Technology MRVL and Astera Labs ALAB in the AI connectivity space.

Marvell Technology remains a key beneficiary of rising AI cluster size and bandwidth requirements. In second-quarter fiscal 2027, demand remained elevated for 800G optical DSPs, while 1.6T products ramped up rapidly. Marvell Technology’s scale-out switching remains on track to more than double in fiscal 2027 as 51.2T products expand across more customers. Management also raised its fiscal 2028 outlook for scale-up optics as customers evaluate NPO and CPO architectures.

Astera Labs is benefiting from rising demand for high-speed connectivity as AI infrastructure shifts toward larger rack-scale systems. PCIe 6 adoption is expanding across Aries and Scorpio, while the Scorpio X-Series has moved into volume production and is expected to become Astera Labs’ largest product family. Taurus, CXL, UALink, optical and custom connectivity programs broaden the longer-term content opportunity.

ADI’s Price Performance, Valuation and Estimates

Shares of ADI have gained 39.7% year to date compared with the Semiconductor - Analog and Mixed industry’s growth of 36.3%.

ADI YTD Performance Chart

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From a valuation standpoint, ADI trades at a forward price-to-sales ratio of 10.17X, higher than the industry’s average of 8.00X.

ADI Forward 12-Month (P/S) Valuation Chart

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The Zacks Consensus Estimate for ADI’s fiscal 2026 earnings implies year-over-year growth of 66.4%. The consensus estimate for fiscal 2026 has been revised upward in the past 30 days.

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ADI currently sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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