Even a Pandemic Can't Halt This Unstoppable Trend

5G isn't a possibility... It's an inevitability.

In the coming years, the semiconductor industry has a strong tailwind from the rollout of fifth generation ("5G") network infrastructure. 5G is expected to be at least 10 times faster than current 4G connectivity speeds. That will allow 5G networks to transfer larger amounts of data with less lag time than ever before.

According to network providers, 5G mobile subscriptions will reach 200 million by 2021. By 2024, that number will multiply by a factor of six.

And despite the pandemic, the chipmaking industry is red-hot right now...

Since bottoming in March, the VanEck Vectors Semiconductor Fund (SMH) has soared almost 60%. One of the main drivers behind the rally has been positive commentary surrounding demand in the space...

Earlier this month, Microchip Technology (MCHP) said it's seeing so much demand for its products that it's having a hard time meeting order deadlines. The company has also noted that it saw fewer cancellations than it expected from the coronavirus.

And just last week, Taiwan Semiconductor (TSM) reported second-quarter earnings per share ("EPS") and revenue that beat estimates, citing strong demand for 5G smartphones and high-performance computers. It also guided full-year revenue growth of 20%, above Wall Street's estimate of 18% growth.

So, the industry wasn't hit as much as feared. Sentiment in the sector remains positive, and it should remain that way.

And that's good news for today's company...

Analog Devices (Nasdaq: ADI) is a $43 billion semiconductor manufacturer. ADI employs some of the best engineers in the country and spent roughly $1.1 billion on research and development – 19% of its net sales – over the past year.

About 20% of ADI's business – more than $1 billion in revenue – is in communications infrastructure. Since 2015, the communications division has grown 17% per year, from $683 million to $1.3 billion.

ADI is no stranger to innovation in the communications industry. It contributed to advancements in 2G, 3G, and 4G networks. Now, it's supplying countless components to competing network providers to support the 5G rollout.

Specifically, ADI is supplying components for multiple-input, multiple-output ("MIMO") antennas. MIMO antennas increase capacity and efficiency by multiplying the number of antennas on both the mobile device and the tower.

The MIMO rollout will be slow. We may not see a full network for five to seven more years. So the benefit for ADI may not come until it's fully rolled out. But it also has a way to benefit from 5G in the immediate future...

Another 15% of ADI's business is in consumer electronics, like smartphones. ADI supports the pressure sensor underneath the touch screen in many iPhones. At about 12% of its revenues, Apple is ADI's single largest customer.

So ADI doesn't just supply communications infrastructure technology, it's also a specialty component supplier for 5G handsets. And that should be a tailwind for the company as consumers upgrade to 5G-eligible smartphones. That positions the company to benefit now as well as much later in the 5G cycle.

The lead up to 5G is already boosting the company's results. We saw that from a recent ADI update on how the third quarter is going...

The company said it has been seeing better-than-expected demand across its products, primarily in the Communications and Industrial segments. And like its peers, it also said cancellations have been less than expected, driving backlog higher.

The outlook is so strong that ADI raised its earnings and revenue guidance for the third quarter. The company endorsed third-quarter revenue of $1.45 billion versus $1.32 billion prior and the Wall Street expectation of $1.43 billion. It also anticipates third-quarter adjusted EPS of $1.33 versus prior guidance of $1.08 and the estimate of $1.29.

And it announced an all-stock deal to acquire competitor Maxim Integrated Products (MXIM) for more than $20 billion. ADI shareholders will own 69% of the combined entity while Maxim shareholders will own 31%.

Maxim's core strengths are in data centers and the automotive industry, so there's only marginal overlap with ADI's business and therefore minimal restructuring post-merger. And combining the two companies will make the new firm a much stronger competitor against rivals in the industry.

ADI is in a great position to profit as the 5G revolution unfolds. That alone would be a boost for ADI shares. In addition, the semiconductor industry continues to see strong demand, despite the pandemic's impact on the global economy, giving shares an added tailwind.

Sometimes investing is simple.