⚠ Reduced Control Over Pricing and YieldsModerate threat

Analog Devices (ADI) — threat to the moat

By buying more than half its wafers, ADI has ceded some control over pricing, yield and supply, a cost that shows up only when demand is strongest.

A company that buys most of its wafers has handed part of its gross margin to its suppliers. The 10-K lists what ADI gives up by relying on outside foundries and subcontractors: "reduced control over availability, pricing, capacity utilization, delivery schedules, manufacturing yields, costs and supply chain allocations"1.

Analog Devices reported gross margin, recent periods (%)62.1Q3 FY202560.89M FY202566.69M FY202667.3Q3 FY2026Analog Devices Q3 FY2026 results release and Form 10-Q
So far the margin has risen with volume.

So far the trade has worked. Reported gross margin was 62.1% in the third quarter of fiscal 2025 and 67.3% a year later2; over nine months it rose from 60.8% to 66.6%3. Suppliers have not squeezed the margin during the upturn.

The risk is timing. Foundry prices and allocations tighten when demand is strongest, which is exactly when ADI's revenue would otherwise be rising fastest. The company warns that its foundries "often provide wafer foundry services to our competitors and therefore periods of increased industry demand may result in capacity constraints"4. In a shortage, the foundry decides who gets its capacity, and ADI is one customer among many.

The internal fabs, discussed on Four Fabs of Its Own, are the hedge: the specialised processes that matter most stay in house. But more than half the wafers do not.

This danger would show up as a margin that fails to rise with volume. If reported gross margin falls in a quarter when revenue rises by more than 10% year on year, supplier costs will be taking the gain that volume should bring.

References
  1. ReportedThe 10-K lists what ADI gives up by relying on outside foundries and subcontractors: "reduced control over availability, pricing, capacity utilization, delivery schedules, manufacturing yields, costs and supply chain allocations".
    Analog Devices Form 10-K for fiscal 2025 (year ended 1 November 2025) - manufacturing, wafer sourcing, fabs and properties. — FY2025 · publ. 25 November 2025 · source ↗
  2. ReportedReported gross margin was 62.1% in the third quarter of fiscal 2025 and 67.3% a year later; over nine months it rose from 60.8% to 66.6%.
    Analog Devices third-quarter fiscal 2026 results release, Form 8-K exhibit 99.1 - revenue by end market, margins, EPS, cash flow, balance sheet and fourth-quarter guidance - highlights, income statement, adjusted measures and fourth-quarter guidance. — Q3 FY2026 · publ. 19 August 2026 · source ↗
  3. ReportedReported gross margin was 62.1% in the third quarter of fiscal 2025 and 67.3% a year later; over nine months it rose from 60.8% to 66.6%.
    Analog Devices Form 10-Q for the quarter ended 1 August 2026 - end-market and channel revenue, the Empower acquisition, the Penang sale, the buyback authorisation and the chief operating decision maker. — Q3 FY2026 · publ. 19 August 2026 · source ↗
  4. ReportedThe company warns that its foundries "often provide wafer foundry services to our competitors and therefore periods of increased industry demand may result in capacity constraints".
    Analog Devices Form 10-K for fiscal 2025 (year ended 1 November 2025) - Item 1A risk factors: foundries, Taiwan, distributors, trade, state-backed competitors and variable consideration. — FY2025 · publ. 25 November 2025 · source ↗
Sources
Generated September 29, 2026