Diodes Incorporated Stock To Return To Early 2020 Levels?

Up a strong 137% since March, we believe Diodes Incorporated stock (NASDAQ: DIOD) could see significant downside. Diodes, a semiconductor manufacturer catering to the consumer electronics, industrial, and automotive markets, saw its stock rise around 40% since the start of 2020. It traded at $50 in February 2020 – just before the outbreak of coronavirus – and is currently almost 60% above that level, as well. Further, due to poor Q3 2020 results, and unlikely demand growth in the near to medium term, the stock has the potential to drop 30% to around $55, its early 2020 level. Our conclusion is based on our comparative analysis of Diodes stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 71% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how Diodes stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Diodes and S&P 500 Performance Over 2007-08 Financial Crisis

We see Diodes stock declined from levels of around $24 in September 2008 (pre-crisis peak) to levels of around $8 in March 2009 (as the markets bottomed out), implying DIOD stock lost two-thirds of its value from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of $20 in early 2010, rising by around 2.5x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

DIOD Fundamentals Over Recent Years

DIOD revenues increased from $0.9 billion in 2016 to $1.2 billion in 2019. With rising revenues, EPS also rose from $0.33 to $3.02 over this period, a jump of around 9x, as a result of a drop across all operating expense heads.

Does DIOD Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Diodes’ total debt dropped from $14 million in 2016 to $33 million in 2020, but its total cash came in at $263 million in 2019, roughly flat from the level in 2016. Further, the company generated around $230 million cash from operations in fiscal 2019. A strong cash cushion combined with a steady operating cash flow, provides the company the means to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

With the recent surge in the number of new Covid-19 cases in the U.S., we expect semiconductor demand to struggle in the near term. This is evident from Diodes’ Q3 2020 earnings, where revenue came in at $309 million, down from $323 million for the same period last year. The company’s COGS and operating expenses did not drop at the same rate, which led to EPS dropping from $0.75 to $0.52. Going forward, if the company keeps seeing weaker revenues, this will further weigh down profitability. We believe that Diodes stock has around 30% potential downside in the near term, and even as the lockdowns are gradually lifted, revenues will stay weak in the near to medium term.

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