Up 3x Since March, Flex Ltd. Stock’s Rally Seems Over
After rising more than 3x from its low in March, at the current price of $18 per share, we believe Flex Ltd. stock (NASDAQ: FLEX) has significant downside. Flex Ltd., an electronics contract manufacturer, saw its stock rise from $6 to $18 off the recent bottom, significantly more than the S&P which increased by over 70% from its lows. However, we believe that Flex stock could drop to around $14, its October 2020 level, falling over 20% from its current level, driven by weak Q2 2021 results and no signs of immediate demand recovery. Our dashboard What Factors Drove 138% Change In Flex Ltd. Stock Between 2018 And Now? has the underlying numbers behind our thinking.
The stock price rise since 2018-end came despite a 1% drop in revenue per share, as a 5% drop in revenues nullified a 4% drop in the outstanding share count. Revenue dropped from $25.4 billion in 2018 to $24.2 billion in 2020 (FLEX’s fiscal year ends in March).
The stock’s P/S (price-to-sales) multiple rose from 0.16x in 2018 to 0.25x by 2019 end, and has since further jumped to 0.38x, riding the rally in technology stocks. We believe that the company’s P/S ratio has significant downside in the near term, when compared to levels seen in the recent past: 0.16x in the end of 2018, and 0.25x as recently as late 2019.
Where Is The Stock Headed?
The global spread of coronavirus and the resulting lockdowns in early 2020 have hurt industrial and manufacturing activities. The pandemic has hurt Flex’s revenues with Q2 2021 revenues coming in at $6 billion, down from $6.1 billion in Q2 2020. However, EPS improved to $0.23 from -$0.23 for the same period last year, but this was largely due to a $90 million drop in restructuring charges, and a drop in the effective tax rate. We believe that going forward, revenue will remain weak in the near to medium term, and this will weigh on profitability. We believe that Flex’s P/S multiple will drop to around 0.31x (the average of the current level and that of 2019-end), which will drive Flex’s stock down to as low as $14, a downside of more than 20% from the current price around $18.
While Flex Ltd. stock may not be as attractive, 2020 has created many pricing discontinuities which can offer interesting trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Apple vs Microsoft. Another example is Intel vs Cisco.
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