Rising 1.5x From Its Low, Has Diodes Inc. Stock Peaked?

After a 1.5x rise since its low in March, at the current price of around $50 per share, we believe Diodes Incorporated stock (NASDAQ: DIOD) could see significant downside. The stock has recovered to the level it was at before the drop in March, but in reality, demand and revenues will likely be negatively affected this year. Diodes’ stock has already rallied from $33 to around $50 off the recent bottom compared to the S&P 500 which moved 45%.

Diodes’ stock is up about 76% from levels seen at the end of 2017, over 2.5 years ago. This rise came due to an 18% rise in revenue, which despite a 4% increase in the outstanding share count, translated into a 14% rise in revenue per share (RPS).

Further, its P/S multiple jumped from 1.3x in 2017 to 2.3x in 2019, as investor expectations rose as a result of the company’s improved profitability. A drop in operating expenses saw EPS rise from -$0.04 in 2017 to $3.02 in 2019. However, the P/S multiple has dropped to 2x so far this year, and we believe the stock could see further downside, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 75% Change in Diodes Stock between 2017 and now? has the underlying numbers.

So what’s the likely trigger and timing for this downside?

The global spread of Coronavirus has meant there is much lower demand for computing and hardware devices across all markets, which means lower demand for Diodes’ products. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. The effect of this on Diodes’ business is evident from their Q2 2020 earnings, where revenue came in at $288 million, down from $322 million for the same period in 2019. Further, as operating expenses didn’t drop in proportion to the drop in revenue, net income fell around 40% from $36 million to $21 million. We expect the trend in revenue to continue into 2H 2020, as demand across semiconductor markets struggles to get back to pre-Covid levels.

If there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S decline from the current level of 2x to around 1.7x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $42.

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