Diodes Incorporated (NASDAQ:DIOD) is a long-term growth play in the semiconductor market. The company’s power management products will drive its overall revenue growth in the next five years. The company offers power management products which are capable of maximizing power density in electronic appliances. The company’s revenue has grown at a CAGR of 7% in the last five years, and I expect revenue will continue to grow at such rate in the next five years. Diodes’ stock is currently hovering around near its 52-week high. Long-term investors can buy the stock during pullbacks to maximize their profit.
Diodes is a manufacturer and supplier of discrete, logic, analog and mixed-signal semiconductor products. The company supplies these products in the following markets: industrial, consumer electronics, communications, computing and automotive. The company’s expertise is designing innovative and highly power-efficient semiconductor products in miniature packaging. Its products are sold primarily in Asia, North America and Europe.Source: Pixabay
Long-Term Growth Opportunities
Diodes’ long-term growth driver is its power management product family, which includes AC-DC and DC-DC converters, Battery Management System, LED Drivers, Low Dropout Regulators, Motor Control, Protected Switches, and Gate Drivers. The company’s expertise is offering customers power management semiconductor products in small packages, which can help in minimizing the size of the applications in which they are incorporated. These semiconductor products are energy-saving and highly integrated. In addition, these products offer superior performance and better time to market. These products support a wide range of applications and markets. Due to these reasons, Diodes’ long-term revenue growth potential from these products is very high.
The power management IC (integrated circuit) market is a growing one. The growth of this market is driven by increasing demand for consumer, automotive and industrial products in which power management ICs are incorporated. Diodes’ focus is on developing power management ICs for high-volume and high-growth applications, such as LCD and LED televisions, and LED lighting.
According to a report:
The Smart TV market is expected to register a CAGR of 16.52% during the forecast period from 2020 to 2025.
According to another report:
The global LED lighting market size was $67.6 billion in 2019, and it is projected to witness a CAGR of 12.9% during the forecast period (2020-2030).
Both Smart TV and LED lighting are high-growth markets. Since Diodes is a strong player in these markets, its long-term revenue will grow significantly.
Second-Quarter 2020 Financial Results
The company’s second-quarter 2020 revenue came in at $288.7 million, down 10.3% YoY. Second-quarter 2020 GAAP net income came in at $21 million, or $0.40 per diluted share, down 42.8% YoY. Second-quarter 2020 non-GAAP adjusted net income came in at $28.6 million, or $0.54 per diluted share, down 29.87% YoY. Both the top line and the bottom line of the company decreased significantly during the second quarter of 2020, driven by the impact of the COVID-19 pandemic. However, I believe despite the ongoing soft business environment, larger trends driving Diodes’ business remain intact.
The good news is that the company’s newly released 18-volt DC-DC converters and bipolar power transistors, which are power management products, are capturing design wins in networking applications. This supports the investment thesis that the company’s power management products will drive its long-term revenue growth.
The market for the discrete, logic and analog semiconductor components is highly competitive. Diodes’ competitors include Infineon Technologies (OTCQX:IFNNY), NXP Semiconductors (NXPI), ON Semiconductor (ON), Vishay Intertechnology (VSH) and Toshiba Corporation (OTCPK:TOSYY). Diodes competes with these companies on the basis of price and quality of its products, product performance, technological innovation, packaging expertise and customer service.
The company’s competitive advantage is flexible, scalable and cost-effective manufacturing of technologically advanced semiconductor products. Its manufacturing base is designed in such a way that the company can respond quickly to changes in demand trends. The company’s another competitive advantage is the breadth of its product portfolio, which helps it attract new customers and retain existing customers. Due to these competitive advantages, Diodes’ revenue will increase significantly in the long term.
Diodes’ most similar peers are Infineon Technologies, NXP Semiconductors, ON Semiconductor and Vishay Intertechnology. Diodes’ non-GAAP forward P/E multiple is 29.03x compared to Infineon Technologies’ 45.99x, NXP Semiconductors’ 26.61x, ON Semiconductor’s 39.54x, and Vishay Intertechnology’s 21.62x. Diodes’ trailing twelve-month price to sales multiple is 2.72x compared to Infineon Technologies’ 4.45x, NXP Semiconductors’ 4.71x, ON Semiconductor’s 2.05x, and Vishay Intertechnology’s 1.05x. Diodes’ trailing twelve-month price to cash flow multiple is 15.97x compared to Infineon Technologies’ 21.52x, NXP Semiconductors’ 15.90x, ON Semiconductor’s 16.54x, and Vishay Intertechnology’s 8.97x.
Diodes appears to be fairly valued when it is compared to its competitors. The company has a strong balance sheet comprising of $506.86 million in cash and $393.93 million in debt. The company’s strategy is rapid introduction of semiconductor products with short design cycles. In addition, it wants to expand its addressable market opportunity by developing new products for adjacent markets. I believe this strategy will help the company expand its long-term growth opportunities. Since the stock is fairly valued, its near-term upside is limited. However, from a long-term perspective, it has significant upside left.
In the last five years, Diodes’ revenue has grown at a CAGR of 7%, and I expect revenue will continue to grow at this rate in the next five years. The company’s trailing twelve-month revenue is $1,194.2 million. At a CAGR of 7%, the end-2025 revenue will be $1,675 million, or $32.32 per share. In the last five years, shares have traded between the price to sales multiples of 1x and 2.8x. Applying a price to sales multiple of 2.8x on the company’s end-2025 revenue per share, I get $90.50 as the end-2025 share price. Diodes’ price to sales multiple is continuously rising. The company’s competitors, Infineon Technologies and NXP Semiconductors, are currently trading at price to sales multiples of above 4x. At a higher price to sales multiple, Diodes’ end-2025 share price would be significantly higher. This implies the stock has significant upside in the next five years.
The company’s manufacturing efficiency plays an important role in revenue growth and profitability. However, it is very difficult to increase the manufacturing efficiency since the manufacturing and testing process is complex and requires advanced and costly equipment. Technical or other problems in the manufacturing process could lead to low yields, production delays and order cancellations, which in turn could negatively impact revenue growth and profitability of the company.
The company’s new product development program is based on low pin count semiconductor products with at least one active or passive component. This is a complex architecture. If the company fails to develop new technologies from this architecture, or fails to anticipate changes in existing technologies, there could be delay in development of new products. As a result, the company’s revenue growth and profitability could be adversely affected.
Diodes is going through a strong design win momentum across a wide product portfolio. The company’s power management products are seeing strong adoption due to ongoing transition to IC-based power supplies. Despite the current soft macro environment, its long-term revenue growth trend remains intact. In the long term, the stock has significant upside from the current level. Diodes is a good business to own for the long term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.