Further Upside Possible For Flex Ltd?

December 10th, 2020 by Trefis Team
FLEX: Flex logo
FLEX
Flex

Despite rising more than 2.5x from its low in March, at the current price of $16 per share, we believe Flex Ltd. stock (NASDAQ: FLEX) has further upside potential. Flex Ltd. is an electronics contract manufacturer, and is one of the leading electronics OEM and design manufacturers. Flex stock has increased from $6 to $16 off the recent bottom, significantly more than the S&P which increased by over 60% from its lows. However, we believe that Flex stock could cross its early-2018 high, rising over 20% from its current level to touch $20, driven by expectations of rising demand and strong Q2 2021 results despite the pandemic. Our dashboard What Factors Drove 114% Change In Flex Ltd. Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2018-end came despite a 1% drop in revenue per share, as a 5% drop in revenues wiped out a 4% drop in the outstanding share count. Revenue dropped from $25.4 billion in 2018 to $24.2 billion in 2020 (FLEX’s fiscal year ends in March).

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Flex’s P/S (price-to-sales) multiple rose from 0.16x in 2018 to 0.25x by 2019 end, and has since further jumped to 0.34x, on the back of strong Q1 and Q2 2020 results. We believe that the company’s P/S ratio has the potential to rise in the near term on expectations of continuing demand growth and favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 have hurt industrial and manufacturing activities. The pandemic has hurt Flex’s revenues with Q1 2021 revenues coming in at $5.2 billion vs $6.2 billion for the same period last year. However, in Q2 2021, revenues improved to $6 billion, down marginally from $6.1 billion in Q2 2020. Further, a drop in cost of sales saw gross margins jump from 3.1% to 6.6%. This, combined with slightly lower operating expenses, helped the company post a net profit of $113 million in Q2 ’21, a strong turnaround from the net loss of $117 million in Q2 ’20. We believe that going forward, steady revenue growth combined with continued strong execution, will help Flex Ltd. drive profitability up even further.

We expect this to drive up the company’s P/S multiple, and believe that Flex stock can rise over 20% from current levels, to touch $20.

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