The Hyve Business And Expansion Into India And Japan Will Strengthen Future Market Position

Key Takeaways

• Strong growth in cloud, cybersecurity, and data portfolios positions TD SYNNEX for increased revenue and lucrative returns through higher net margins.
  
• Expansion into new markets like India and Japan enhances geographic diversification and mitigates risks from economic instabilities in existing markets.
  
• Declining margins in Hyve, increased borrowings, and European uncertainties pose risks to TD SYNNEX's profitability and market growth, with near-term pressures anticipated.

Catalysts

Operates as a distributor and solutions aggregator for the information technology (IT) ecosystem.

• TD SYNNEX's cloud, cybersecurity, and data and analytics portfolios are experiencing double-digit growth, indicating strong future demand and positioning the company for increased revenue and potentially higher net margins as these sectors tend to have lucrative returns.
  
• The successful expansion of vendor relationships into new markets such as India and Japan positions TD SYNNEX for robust revenue growth due to geographic diversification and access to emerging markets, which can mitigate risks from economic instabilities in existing markets.
  
• The Hyve business, driven by demand from cloud adoption and AI integrations, shows potential for significant revenue growth. The focus on end-to-end capabilities and investment in liquid cooling and power management solutions could yield higher operating margins as these solutions become more mainstream.
  
• Investments in the IT ecosystem to accommodate rapid technological changes, like AI, suggest that TD SYNNEX is capitalizing on major industry trends for long-term revenue growth and establishing itself as a pivotal player in delivering integrated solutions.
  
• The ongoing focus on developing higher-margin service enablement solutions to meet specialized customer demands could improve profitability by increasing service revenue, which traditionally has higher margins compared to hardware sales.

TD SYNNEX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TD SYNNEX's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 1.5% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $12.44) by about January 2028, up from $683.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, down from 17.6x today. This future PE is lower than the current PE for the US Electronic industry at 25.5x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

TD SYNNEX Future Earnings Per Share Growth

Risks

• The Hyve business, despite its strong growth, showed declining margins due to prior year one-time gains not repeating, posing a risk of negatively impacting overall operating margins and earnings.
  
• Increased interest expense due to higher average borrowings could pressure net income, as seen with a $86 million expense, which was higher than expected.
  
• Political instability and macroeconomic uncertainties in Europe create potential risks to market growth and revenue, potentially leading to inconsistent earnings outcomes and projections.
  
• The inventory and tariff uncertainties particularly around PCs could affect revenue if demand fluctuates unexpectedly, especially as significant commercial growth is anticipated in this sector.
  
• Development of new capabilities in Hyve, such as investments in liquid cooling and power management, entail costs and lead to potential operating margin pressures before these investments yield returns, impacting near-term profitability.

Valuation

• The analysts have a consensus price target of $146.54 for TD SYNNEX based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $68.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of $141.79, the analyst's price target of $146.54 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.