Verdict: KEEP | QQQ Weight: 0.84% (rank 19/50) | Confidence: High | LR: 1.2

Summary

Revenue +30% Y/Y and accelerating into cyclical recovery. Margins expanding. CEO called FY2026 a "potential banner year." Factor regression shows 39.2% idio variance (below 75% target — ADI is 61% factor-driven), with MTUM loading of -0.29 (mild anti-momentum). Trailing alpha is +24.6% annualized. The anti-momentum signal is present but weaker than all 6 factor-mismatch removes in the basket (range: -0.36 to -0.57), and paired with strong positive trailing alpha rather than the negative alpha that characterized our removes.

Market consensus is uniformly bullish (28/35 Buy, median target $400, zero sells). No mispricing identified — consensus is approximately correct on industrials recovery, AI/datacenter exposure, and beat cadence. The only potential crack is pricing non-recurrence in H2: ≈$57M of Q2's sequential growth is non-recurring channel repricing that drops out in Q3, creating a ≈$0.10-0.20 drag on H2 EPS estimates. Too small to trade.

No idiosyncratic weakness. Burden of proof for removal not met.

Factor Decomposition

Source: iev regress ADI (251 daily observations)

SPY    beta=+1.64   63.4% of variance
MTUM   beta=-0.29  -11.9%
XLK    beta=+0.18    9.3%
Idio            39.2%

alpha=24.6%  sigma_idio=23.9%  R-sq=60.8%
Orthogonal SR = alpha/sigma_idio = 1.03

Anti-momentum context — ADI vs basket removes:

Our removes had negative trailing alpha + strong anti-momentum. ADI has the opposite: strong positive alpha, mild anti-momentum. Different animal.

Financials

Q1 FY2026 (ended January 31, 2026)

Source: 10-Q filed 2026-02-18, lines 109-131

Source: Earnings call, CFO Richard Puccio (lines 59-62)

GAAP/Non-GAAP gap (≈650 bps GM) driven by ≈$385M/Q intangible amortization from Maxim acquisition (10-Q line 287).

Segment Revenue (10-Q lines 493-497)

Q2 FY2026 Guidance (transcript line 65)

• Revenue: $3.5B +/- $100M (+11% seq, ≈45% Y/Y)
• Non-GAAP Operating Margin: 47.5% +/- 100 bps
• Non-GAAP EPS: $2.88 +/- $0.15
• Tax rate: 11-13%

CFO (line 72): "Q2 strongest sequential quarter, normally up mid-single digits, 4% 5%. Sell-in sell-through reflects 11% sequential growth significantly above seasonal."

Earnings Beat History

Four consecutive beats with no deceleration in beat magnitude.

Pricing Decomposition — The One Detail Consensus Might Miss

CFO Puccio was unusually specific about Q2 pricing (lines 126-131):

Q2 sequential growth: +$340M (+10.8%)
  From pricing:             ≈$113M  (1/3 of sequential increase)
  From volume:              ≈$227M  (2/3)

Of the $113M pricing:
  Channel repricing:        ≈$57M   (NON-RECURRING, drops out Q3)
  Sustainable price lift:   ≈$57M   (annual direct customer negotiation)

Q3/Q4 forward: +50 bps incremental pricing = ≈$17.5M/quarter

H2 math: Ex-pricing, sequential growth is ≈7% (CFO confirmed, line 128), still above 4-5% seasonal. The $57M channel repricing drops out in Q3, creating a headwind. If analysts naively extrapolate Q2's 11% sequential growth:

• Naive Q3: $3.5B x 1.07 = $3.745B
• Adjusted Q3: ($3.5B - $57M non-recurring) x 1.07 + $17.5M pricing = ≈$3.70B
• Delta: ≈$45M or ≈1.2% of revenue, ≈$0.05-0.08 EPS

Cumulative H2 impact: ≈$0.10-0.20 on NTM EPS ($12.94 consensus). That's 1-1.5%. Not enough to move the stock materially, but worth tracking.

Market Consensus

Street: 28/35 Buy or Strong Buy, zero sells. Median target $400 (+30%). All targets set Feb 19 — none revised despite 15% drawdown. Lowest target ($295) is only 4% below current.

Options positioning (June 18 expiry, spans May 21 earnings):

• OI: Bullish. P/C ratio 0.72 (calls 1.4x puts).
• Today's flow: Bearish. P/C volume 4.22. 1,501 puts traded at $270 strike (2.6x OI), 437 puts at $240. Institutional hedging of long positions after the 15% drawdown.
• Call IV > Put IV by 3.3% — unusual inversion suggesting institutions writing covered calls while buying protective puts. Classic "concerned long" positioning.
• Max pain at $280 (stock at $307). Bearish max pain is unusual for a consensus Buy.

Cross-reference — analog peers confirm consensus narrative:

• STM (Jan 29): Peers "talking above seasonal" — analyst questioned if another false start
• TXN (Jan 27): "Maybe little bit above seasonal" but also "industrial market needs correction"
• ARW distribution (Feb 5): "Q1 expecting global perform above seasonal trends all regions"
• LFUS (Jan 28): "Emerging signs broad industrial recovery"
• Parker Hannifin (Jan 29): "Gradual industrial recovery, positive sentiment distribution channel"

The "above seasonal" industrial recovery is cross-confirmed by every data point in the supply chain: analog semis, passive components, distribution, industrial conglomerates. This is not a sell-side hallucination.

Counterparty test: If I remove ADI, who am I saying is wrong? 28 Buy-rated analysts, every institutional holder in a $150B name, the entire industrial supply chain confirming recovery. My edge would be... what? The pricing non-recurrence that the CFO explicitly disclosed? The auto weakness that management already guided for? There is no counterparty. No edge for removal.

Bear Case for Removal

1. Anti-momentum (MTUM beta = -0.29). Present, but below our empirical removal threshold of -0.36 (CTAS, weakest remove). Combined with +24.6% trailing alpha, not negative alpha.

2. Low idio variance (39%). Removing ADI is ≈61% a factor bet. We have no sector thesis against semiconductors.

3. Automotive weakness (25% of revenue). Book-to-bill under 1. Management: "flat down sequentially, bit below seasonal" for Q2 (line 106). Expects H2 recovery (line 107). Tariff exposure real. But disclosed and priced into the 15% drawdown.

4. Pricing non-recurrence. ≈$57M drops out in Q3. Volume growth ex-pricing still above seasonal at ≈7%. Impact is ≈1.2% of revenue — a headwind, not a thesis break.

5. Third false start risk. STM's analyst asked directly: "Shouldn't get carried away like last two years where many fall starts?" If industrial recovery stalls, entire analog group reprices. But current data (book-to-bill >1, above-seasonal volume, distributor confirmation) doesn't support this. And it would be a sector bet, not stock-specific.

None of these constitute idiosyncratic weakness sufficient to clear the burden of proof for removal.

Why KEEP

1. Revenue accelerating. +30% Y/Y in Q1, guide implies ≈45% Y/Y in Q2. Q2 guide of $3.5B exceeds prior cycle peak revenue. Opposite profile of our removes.

2. Margins expanding. Non-GAAP GM 71.2% heading to ≈73%. Operating margin 45.5% heading to 47.5%. Revenue +30% Y/Y, OpEx only +16% Y/Y. Operating leverage significant.

3. Industrial recovery has runway. Still 20% below prior peaks. No restocking visible yet. Book-to-bill well above 1 across all industrial subsectors and geographies (CEO, line 101).

4. AI/datacenter is real. $1B+ datacenter run rate growing 50%+. ATE at record on HBM4/advanced packaging. Combined ≈20% of revenue. Not narrative — revenue.

5. Earnings catalyst May 21. Strong guide plus 4-quarter beat streak. Consensus $2.90 vs guide midpoint $2.88. Beat is plausible.

6. Valuation reasonable. Forward P/E 23.7x. Cheaper than TXN (27x) with materially better growth and cleaner earnings profile (TXN has $5B+ fab depreciation headwind).

7. Anti-momentum below removal threshold. MTUM beta -0.29 vs -0.36 weakest remove (CTAS). Trailing alpha +24.6% vs negative for all removes.

ADI vs TXN — If One Goes, It's TXN

TXN reports April 28. Consensus $1.37, guide mid $1.35. If miss — flip to REMOVE. ADI is the stronger franchise.

Catalysts in Window (March 27 - July 10)

Balance Sheet (10-Q lines 1071-1088)

Inventory build is intentional (10-Q: "building inventory levels to support increased demand"). DSO improving. Debt: $7.2B long-term + $900M current (due Dec 2026). Net leverage 0.8x. $3.0B undrawn revolver. No covenant risk.

Insider Activity

Only open-market sale: Raymond Stata (founder, age 86), 6,250 shares for $2.0M on March 11. Routine estate planning. All other recent transactions are compensation awards. No operating executive selling. Short interest 2.1% of float, 2.2 days to cover. Not meaningful.

Verdict

KEEP at benchmark weight (0.84%).

ADI is one of the stronger names in the selectable universe. Cyclical recovery with secular AI tailwinds, accelerating revenue, expanding margins, reasonable valuation. The only signal for removal is mild anti-momentum (beta = -0.29), which is below our empirical removal threshold and paired with strong positive trailing alpha. No mispricing identified — consensus is approximately correct.

The pricing non-recurrence creates a ≈1-1.5% drag on H2 estimates, the only detail consensus might be lazy about. Not enough to trade.

Sources: ADI 10-Q (2026-02-18), Q1 FY2026 earnings call (2026-02-18), iev factor regression (251d), yfinance (2026-03-27), peer transcripts (STM, TXN, ARW, LFUS, PH). All financials verified against 10-Q line numbers. All transcript claims verified with line references.