Despite Rising 2x From Its Covid Lows, Does Avnet Stock Have Further Upside?
Up 2x since the March lows of this year, at the current price of around $38 per share, we believe Avnet Inc. stock (NASDAQ: AVT), a distributor of electronic components, has room for further upside. Avnet stock has jumped from $20 to $38 off its recent bottom, slightly more than the S&P which increased by around 70% from its lows. However, the stock is still down around 10% from its early 2020 high of $42. We believe that Avnet’s stock could rise back to this level, with an upside of around 10%, driven by expectations of rising demand and strong Q1 2021 results despite the pandemic. Our dashboard What Factors Drove 7% Change In Avnet Stock Between 2018 And Now? has the underlying numbers behind our thinking.
The stock price fall since the end of 2018 came due to a 7% drop in revenue from $19 billion in 2018 to $17.6 billion in 2020 (Avnet’s fiscal year ends in June). However, this was offset by a 16% decrease in the outstanding share count, which led to revenue-per-share rising by around 11%.
Avnet’s P/S (price-to-sales) multiple rose marginally from 0.23x in 2018 to 0.24x in 2019, but has since dropped to 0.22x. We believe that the company’s P/S ratio has the potential to rise in the near term on expectations of continuing demand growth and favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of coronavirus and the resulting lockdowns in early 2020 saw a drop in demand for semiconductors, and Avnet, a manufacturer and distributor of electronic components, was negatively impacted by this. However, over the past quarter, demand from the IoT (Internet of Things) and automation sector has risen, and this is evident from Avnet’s Q1 2021 results, where revenue rose to $4.72 billion from $4.63 billion for the same period last year. However, a rise in COGS and operating expenses led to net profit dropping from $41 million to -$19 million, driving EPS down to -$0.19 from $0.40. However, we believe that with demand continuing to rise, Avnet will continue to see revenue growth in the near to medium term, causing profitability to eventually rise.
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We expect this to drive up the company’s P/S multiple, and believe that Avnet’s stock can gain around 10% from current levels, to regain its early 2020 high of $42.
While Avnet stock is worth considering, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counterintuitive the stock valuation is for Intel vs Cisco.
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