Direct Supply Chain Shifts And Digital Competition Will Erode Margins

Key Takeaways

• Direct supply chain adoption, digitalization, and new competitors threaten Avnet's distribution model, causing persistent margin pressure and weakened profitability.
  
• Increasing supply chain complexity and dependence on volatile end markets make Avnet's revenue and earnings more unpredictable and susceptible to downturns.
  
• Digital transformation, strong Asian growth, improving sales momentum, operational efficiencies, and disciplined capital management position Avnet for sustainable profitability and enhanced shareholder returns.

Catalysts

Distributes electronic component technology.

• The ongoing adoption of direct supply chain models by large manufacturers poses a significant threat to Avnet, as these customers increasingly bypass traditional distributors, which is likely to lead to erosion in revenue volumes and further squeeze already pressured gross margins over the next several years.
  
• Accelerated digitalization and pricing transparency in B2B procurement, coupled with the rise of digital-native competitors, will undermine Avnet's traditional distribution model and create persistent margin compression, impacting both operating income and net earnings as the industry continues to structurally evolve.
  
• The trend toward onshoring and regionalization of electronic manufacturing creates more fragmented and less efficient distribution networks for Avnet, which will elevate operational costs and reduce profitability, particularly as regional sales mix shifts unpredictably and supply chain complexity increases.
  
• Intensifying commoditization of electronic components erodes Avnet's pricing power and differentiation, making it harder to sustain historic profitability levels and leading to long-term deterioration in net margins and returns on capital.
  
• High customer concentration and continued heavy reliance on cyclical end markets such as automotive and industrial make Avnet's revenue base more volatile and susceptible to abrupt declines, especially if disruptive technology or economic downturns trigger the loss of key accounts or segments-this directly threatens the predictability of future earnings and cash flows.

Avnet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Avnet compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Avnet's revenue will grow by 4.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.1% today to 2.6% in 3 years time.
• The bearish analysts expect earnings to reach $641.4 million (and earnings per share of $7.75) by about August 2028, up from $240.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, down from 18.7x today. This future PE is lower than the current PE for the US Electronic industry at 22.7x.
• Analysts expect the number of shares outstanding to decline by 3.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.82%, as per the Simply Wall St company report.

Avnet Future Earnings Per Share Growth

Risks

• The stabilization and sequential improvement in both revenues and margins for the Farnell business, along with ongoing digital initiatives and management changes, could result in a sustained recovery and expansion in operating margins, leading to higher profitability and earnings.
  
• Continued robust growth in Asia, which delivered double-digit year-over-year revenue increases and has historically led the company out of downturns, may drive overall top-line growth and offset regional weaknesses, supporting stronger company-wide revenues.
  
• Improved book-to-bill ratios above parity in all regions and growing backlog signal potential for continued sales momentum, which could translate to higher future revenue and improved earnings if customer demand continues to recover.
  
• Investments in digital infrastructure, cost optimization, and demand creation capabilities-such as leveraging engineering talent and field application engineers-position Avnet to benefit from technology adoption trends, potentially enhancing both operating efficiency and net margins.
  
• Management's targeted inventory and working capital optimization, successful debt reduction, ongoing share repurchases, and commitment to returning capital to shareholders may improve cash flow and earnings per share, supporting higher share valuations over the long term.

Valuation

• The assumed bearish price target for Avnet is $43.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Avnet's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $64.0, and the most bearish reporting a price target of just $43.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $25.0 billion, earnings will come to $641.4 million, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $53.47, the bearish analyst price target of $43.0 is 24.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.