What’s The Upside For Avnet Inc?

Despite an almost 45% rise since the March lows of this year, at the current price of around $29 per share, we believe Avnet Inc. stock (NASDAQ: AVT) is still a good opportunity for investors. Avnet stock has increased from $20 to $29 off the recent bottom, less than the S&P which increased by almost 60% from its lows. Further, the stock is down around 20% from its 2020 pre-Covid high of $36. We believe that Avnet’s stock could regain its pre-Covid high, rising around 25% from its current level, driven by expectations of rising demand and strong Q1 2021 results despite the pandemic. Our dashboard What Factors Drove -21% Change In Avnet Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price fall since 2018-end 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 outweighed by a 16% decrease in the outstanding share count, which led to revenue-per-share (RPS) rising by just 11%.

Avnet’s P/S (price-to-sales) multiple rose marginally from 0.23x in 2018 to 0.24x by 2019 end, but has since dropped to 0.16x. 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 across the semiconductor industry, which negatively affected Avnet’s business, as a manufacturer and distributor of electronic components. However, over the past few months demand from the IoT and automation sector has risen significantly and this is evident from Avnet’s Q1 2021 results, where revenue rose YoY from $4.63 billion to $4.72 billion. However, a rise in COGS and operating expenses led to a drop in net profit from $41 million to -$19 million, driving EPS down to -$0.19 from $0.40. Regardless, we believe that with demand continuing to rise by the day, Avnet will continue to see revenue growth in the near to medium term, causing profitability to rise.

We expect this to drive up the company’s P/S multiple, and believe that Avnet’s stock can gain around 25% from current levels, to regain its pre-Covid high of $36.

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