Weak FY ’20 Performance Could Drag Diodes Incorporated Stock Lower

by Trefis Team
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Diodes Incorporated stock (NASDAQ: DIOD) is up almost 50% since the beginning of 2020, and at the current price of around $82 per share, we believe that Diodes stock has around 15% potential downside.

Why is that? Our belief stems from the fact that Diodes stock has rallied almost 3x from the low seen at the end of 2017, more than 3 years ago. Further, after posting weak full-year 2020 numbers, and with demand still not up to pre-Covid levels, we believe Diodes’ stock could drift lower. Our dashboard What Factors Drove 185% Change In Diodes Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Diodes stock’s strong rise since late 2017 came despite just a 1% rise in revenues from $1.21 billion in FY 2018 to $1.23 billion in FY 2020. Rising expenses saw net margins drop by 7% over the same period, causing net income to drop around 6%. This, combined with a 3% rise in the outstanding share count, led to earnings per share (EPS) dropping 8%.

In addition, Diodes’ P/E (price-to-earnings) ratio rose from around 14x in 2017 to 29x in 2019, as the semiconductor supply glut cleared out, implying a rise in demand. The multiple has further jumped to 42x currently, in line with the rally in technology stocks. However, given Diodes’ poor FY 2020 earnings, there is possible downside risk for Diodes’ multiple, especially when compared with previous years: P/E of 14x at the end of 2017 and 29x as recently as 2019.

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

The global spread of coronavirus and the resulting lockdowns have led to a drop in industrial semiconductor demand. This is evident from Diodes’ recently reported full-year 2020 earnings, where revenue came in lower at $1.23 billion, vs $1.25 billion in 2020. A rise across all operating expense heads, saw operating margins drop to 10.9% from 16%, and despite a slightly lower effective tax rate, net income dropped by a third to $98 million in FY 2020.

Diodes’ EPS currently stands at $1.92, and with revenue growth expected to remain weak in the near to medium term, if the company is not able to control expenses, we believe the stock will see its P/E multiple decline from the current level of 43x to around 36x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $68, a downside of more than 15% from the current price around $82.

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