Expanding High-Growth Markets And IT Solutions Will Redefine Future Model

Key Takeaways

• Expansion in high-growth markets and strategic partnerships is expected to support revenue and improve net margins.
  
• Focus on strategic technologies like cloud and AI and a service-oriented model is likely to enhance long-term growth and earnings.
  
• Operational disruptions, elevated inventory, and economic headwinds are impacting TD SYNNEX's financial performance, liquidity, and margins, requiring management of costs and efficiencies.

Catalysts

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

• TD SYNNEX's continued expansion in high-growth markets like Latin America and APJ, driven by margin-accretive partnerships with innovative vendors, is expected to support revenue growth and improve net margins.
  
• The strategic emphasis on integrated IT solutions and the launch of new digital platforms like Digital Bridge indicate future increases in operational efficiency, likely boosting net margins and earnings.
  
• Sustained double-digit growth in strategic technologies such as cloud, cybersecurity, and AI provides a solid foundation for future revenue growth, supporting the company's long-term leadership in a rapidly evolving IT landscape.
  
• Focused investments in Hyve, particularly in specialized technical resources, although presently impacting cash flow and gross margins, are aimed at capturing future demand and stabilizing earnings.
  
• The transition towards a more service-oriented model, including the success with major cybersecurity vendors and distribution partners, is expected to enhance higher-margin service revenues, fostering growth in net margins and earnings.

TD SYNNEX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TD SYNNEX's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.1% today to 1.6% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $11.97) by about April 2028, up from $678.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 13.1x today. This future PE is lower than the current PE for the US Electronic industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 1.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

TD SYNNEX Future Earnings Per Share Growth

Risks

• Hyve, a division of TD SYNNEX, reported demand shortfalls and delayed component shipments, potentially leading to lower revenues and impacting the overall financial performance due to temporary operational issues.
  
• There were elevated inventory levels within Hyve and increased working capital requirements, which contributed to a significant cash flow usage of approximately $800 million in the quarter, affecting the free cash flow and liquidity.
  
• Despite a strong sales growth overall, Hyve's demand pausing for a major customer and elevated inventory risk could lead to lower-than-expected net margins due to storage and carrying costs along with interest expenses on increased debt.
  
• There was a greater than expected reduction from gross billings to net revenue due to a higher mix of infrastructure software business, which could potentially impact net margins and earnings growth if this mix shift continues without proportional improvements in operating efficiency.
  
• Economic headwinds and vendor mix resulted in margin pressure in Europe, reflecting potentially weaker profitability in one of the company’s major geographic segments if not managed appropriately.

Valuation

• The analysts have a consensus price target of $135.174 for TD SYNNEX based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $156.0, and the most bearish reporting a price target of just $118.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $65.9 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of $105.77, the analyst price target of $135.17 is 21.8% higher.
• 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.