2023-07-10 00:37:40 ET
Summary
- TD SYNNEX Corporation's Q2 FY23 revenue was $14 billion, a 7.9% decline from Q2 FY22, attributed to a drop in demand for PC ecosystem products.
- The company's stock has fallen more than 25% from its all-time high of $130, but recent trends may indicate a potential reversal.
- Despite strong growth rates and undervaluation, I assign a hold rating on SNX due to potential financial struggles in FY23 caused by lower demand for PC products.
TD SYNNEX Corporation ( SNX ) works as a solutions aggregator and distributor for the IT ecosystem. They provide personal computing devices, mobile phones, printers, data center technologies, etc. SNX recently posted its Q2 FY23 results. I will do its financial, technical, and fundamental analysis in this report. I believe they are undervalued, but there are some headwinds that might affect them in FY23. Hence I assign a hold rating on SNX.
Financial Analysis
SNX recently announced its Q2 FY23 results . The revenue for Q2 FY23 was $14 billion, a decline of 7.9% compared to Q2 FY22. As the market continued to experience post-pandemic drops in demand for PC ecosystem products, I believe a decline in their Endpoint Solutions portfolio was the major reason behind the decline in revenue. Their revenues dropped in the Americas and European region by 11% and 4.1% in Q2 FY23 compared to Q2 FY22. The gross profit margin for Q2 FY23 was 6.8% which was 6.2% in Q2 FY22. I believe the rise in gross margins was mainly due to a mixed shift to high-growth technologies and advanced solutions.
The net income for Q2 FY23 was $133 million, a decline of 10.6% compared to Q2 FY22. The decline in revenues and $8 million increase in SG&A expenses was the reason behind the decline. In my opinion, their financial performance in Q2 FY23 was disappointing; the weakness in End Point Solutions impacted their revenue growth.
Technical Analysis
SNX is trading at the $94.7 level. In March 2020, the stock started its upward journey, and till August 2021, the stock increased by more than 280%, which is a significant move. But since then, the stock has been in a downtrend. It has fallen more than 25% from the $130 level, which is its all-time high. If we look at the chart, we can see that after forming lower highs and lower lows since August 2021, it has recently broken the structure and formed a new higher high, which is a positive sign and might indicate a trend reversal. But there is a possibility that it might be a trap; hence I would personally wait for the stock to cross the $115 level because it will confirm the structure change is genuine, and trend reversal might be possible from that level. But until then, I would advise waiting because, with time, we will get a more clear picture.
Should One Invest In SNX?
First, look at SNX's valuation. I will use PEG and EV / EBITDA ratios to judge its valuation. The PEG ratio is calculated by dividing earnings per share by the annual EPS growth, and the EV / EBITDA ratio is calculated by dividing an enterprise value by its EBITDA. SNX has a PEG [FWD] ratio of 1.05x compared to the sector ratio of 1.87x and has an EV / EBITDA [FWD] ratio of 7x compared to the sector ratio of 14.49x. It clearly shows that SNX is undervalued, and its financial performance over the past two financial years has been quite solid. Their revenues in FY21 and FY22 grew by 58.2% and 97.2%, respectively, which is significant, and I think a growth rate like this is quite rare; to remind you, SNX is not a small capitalization company which makes the growth even more impressive. In addition, if we compare SNX to its peers, we will get to know that it has outperformed almost each of its peers. SNX has a three-year revenue [CAGR] of 41.7%, and its peers like ARW , NSIT , AVT , PLUS , and CNXN have a three-year revenue [CAGR] of 9.34%, 7.25%, 13.23%, 9.19%, 1.86%. Hence looking at the ratios and its growth rate over the past two financial years, I think SNX is undervalued.
Now talking about its balance sheet, its Cash and cash equivalents by the end of May 2023 was $852 million, which was $522.6 million in November 2022, and its long-term borrowings also reduced slightly in Q2 FY23, which is a positive sign. But I have a concern their revenue growth was hampered by weakness in End Point Solutions, which happened due to the lower demand for PC products, and I expect the decline in PC products might continue in the coming quarters, which might continue to affect the demand for its End Point Solutions and this might have an adverse effect on their financial performance in FY23. So I think SNX might stay under pressure in FY23. Hence despite the rapid growth rate and the undervaluation, I assign a hold rating on SNX.
Risk
The market for IT products is impacted by quick technology advancements, new and improved product specification needs, and changing industry norms. The current inventory could see a significant value loss or quickly become obsolete due to these changes. Most of its OEM suppliers only provide rudimentary insurance against inventory value loss. In the event of a supplier price drop, they can, for instance, receive credit from many OEM suppliers for goods kept in inventory. Additionally, most OEM suppliers grant them a restricted right to return a specific percentage of orders. These plans frequently have deadlines and don't always shield owners against drops in inventory value.
Additionally, their OEM suppliers can lose the ability or want to carry out their protection responsibilities to the business. Their gross margins could be lowered, resulting in inventory write-downs, if price protection was reduced or eliminated, or if their OEM suppliers could not uphold their protection duties. They may have excess inventory, which would necessitate inventory write-downs, or they may have insufficient product supplies, which could be detrimental to their business, financial position, and operating results if they cannot manage their inventory with their OEM suppliers with a high degree of precision.
Bottom Line
SNX is a fundamentally strong company, and in the past two financial years, it has outperformed almost all of its competitors. I believe it is undervalued, but I think it might struggle financially in FY23 due to the lower demand for PC products. Hence I assign a hold rating on SNX.
For further details see:
TD Synnex: Short-Term Headwinds Remain