Hottest Chip Maker Sees Cooling Ahead; Analog Devices' unique business model has spared it from the chip slowdown so far, but its latest results include a warning sign

You know the chip slowdown is getting bad when Analog Devices starts to feel it.

That feeling is ever so slight at the moment. The chip maker's fiscal third-quarter results Wednesday morning set records, with revenue jumping 77% year over year to top $3 billion for the first time, and adjusted per-share earnings jumping 47% to a record of $2.52. The results also exceeded Wall Street's forecasts, maintaining a strong track record in which ADI has only slightly missed analysts' quarterly top-line projections twice in the past five years, according to FactSet.

However, the maker of chips used across industrial, auto and consumer applications also noted in its earnings release that "economic uncertainty is beginning to impact bookings." The company expounded further in its conference call, noting that orders "moderated" later in the July-ending quarter, with a "modest increase in cancellations" also taking place during the period. That resulted in a cautious outlook. ADI's projected revenue of $3.15 billion for the current quarter was only 1% above analysts' forecasts—compared with the 5% beat it has averaged over the previous four quarters.

That may still seem rather tame compared with other recent warnings by chip makers such as Micron and Nvidia. But ADI's unique business model and market exposure shelters it from some of the chip sector's more troubled end markets, such as PCs and smartphones. Analog processors are designed for an array of uses , such as power management and thermal control. And ADI specializes in high-end versions of those sorts of chips, targeting markets such as industrial and automotive where design wins can last over several years. These also happen to be the markets where chip supply has been most constrained, as such processors that are typically made on older, depreciated production tools that have become in awfully short supply.

Thus, investors have largely spared ADI as they have fled the rest of the chip sector on worries that the slowing global economy will finally cool chip demand. Ahead of Wednesday's report, ADI was the only large-cap stock on the PHLX Semiconductor Index still positive for the year. This gave the company's cautious tone extra weight. ADI's share price slid nearly 6% Wednesday morning and helped spark a fresh selloff across the sector: The PHLX index was down 3% by midday compared with a decline of less than 1% for the S&P 500.

ADI will still likely keep an elevated position relative to its peers. The company noted Wednesday that its order backlog is still growing. And it employs a unique manufacturing model, where it splits between using its own production facilities and outsourcing but retains the ability to quickly pull outside production work back in-house to keep its own facilities fully used. That also keeps capital spending in check. ADI's capex for the current fiscal year is projected to amount to 6% of revenue, compared with 3% two years ago. Texas Instruments—ADI's closest competitor in analog chip-making that handles a much greater proportion of its production needs in-house—is expected to see its capex bill jump to 13% of revenue this year, compared with 6% two years ago.

TI is hardly the only chip maker expanding production. The shortage of the last two years has spurred a step-up in investments, fueled further by the recently signed Chips Act that will provide subsidies for expansion of domestic chip-making capacity. But new chip plants take years to complete, so new ones run the risk of coming online right when global demand cools—resulting in expensive facilities being underused. ADI's ability to dance around that risk is a distinct advantage, but even the most nimble chip maker can't fully outmaneuver a recession.