Motorola Solutions stock (NYSE: MSI) is up just 8% since the beginning of this year, but at the current price of around $173 per share, we believe that Motorola Solutions stock has 15% potential downside.
Why is that? Our belief stems from the fact that Motorola stock is still up around 92% from the low seen at the end of 2017, almost 3 years ago. Further, after posting weak Q3 2020 numbers, and with demand still not up to pre-Covid levels, we believe Motorola’s stock could drift lower. Our dashboard What Factors Drove 92% Change In Motorola Solutions Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.
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MSI stock’s rise since late 2017 came due to a 23% rise in revenues, which combined with a 2% rise in the outstanding share count, led to a 21% increase in revenue per share (RPS).
In addition, Motorola’s P/S (price-to-sales) ratio jumped from 2.3x in 2017 to 3.4x in 2019, and has since jumped to 3.7x currently. However, given Motorola’s weak Q3 ’20 performance, there is possible downside risk for Motorola’s multiple, especially when compared with previous years: P/S of 2.5x at the end of 2018 and 3.4x 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 hampered demand for Motorola’s telecommunications equipment and radio products. This is evident from Motorola’s Q3 2020 earnings, where revenue came in at $1.87 billion, down from $1.99 billion for the same period in 2019. Further, a rise in operating expenses meant that net profit dropped from $267 million to $205 million. EPS came in at $1.21 vs $1.60 in Q3 2019, and with industrial demand still not back to pre-Covid levels, demand for MSI’s products will remain low in the near-to-medium term.
Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 3.7x to around 3.4x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $150, a downside of almost 15% from the current price of $173.
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