Avnet (AVT)

Electronic components distributor Avnet (NASDAQGS:AVT) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 6% year on year to $5.32 billion. On the other hand, next quarter’s revenue guidance of $5.3 billion was less impressive, coming in 3.3% below analysts’ estimates. Its non-GAAP profit of $0.84 per share was 17.6% above analysts’ consensus estimates.

Company Overview

With a century-long history of adapting to technological evolution, Avnet (NASDAQ:AVT) is a global electronic components distributor that connects manufacturers of semiconductors and other electronic parts with businesses that need these components.

IT Distribution & Solutions will be buoyed by the increasing complexity of IT ecosystems, rising cloud adoption, and demand for cybersecurity solutions. Enterprises are less likely than ever to embark on these complicated journeys solo, and companies in the sector boast expertise and scale in these areas. However, cloud migration also means less need for hardware, which could dent demand for large portions of the product portfolio and hurt margins. Additionally, planning for potentially supply chain disruptions is ongoing, as the COVID-19 pandemic showed how damaging a pause in global trade could be in areas like semiconductor procurement.

Avnet's main competitors include Arrow Electronics in the Electronic Components segment, while Mouser Electronics, Digi-Key Electronics, and RS Components compete with its Farnell segment. Other significant competitors include Future Electronics, World Peace Group, and WT Microelectronics.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $22.15 billion in revenue over the past 12 months, Avnet is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because finding new avenues for growth becomes difficult when you already have a substantial market presence. To expand meaningfully, Avnet likely needs to tweak its prices, innovate with new offerings, or enter new markets.

As you can see below, Avnet grew its sales at a mediocre 4.1% compounded annual growth rate over the last five years. This shows it couldn’t generate demand in any major way and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Avnet’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 8.3% annually.

This quarter, Avnet reported a rather uninspiring 6% year-on-year revenue decline to $5.32 billion of revenue, in line with Wall Street’s estimates. Company management is currently guiding for a 4.7% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below the sector average.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Avnet was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.5% was weak for a business services business.

On the plus side, Avnet’s operating margin rose by 1.6 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Avnet generated an operating profit margin of 2.7%, down 1 percentage points year on year. This reduction is quite minuscule and indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Avnet’s EPS grew at a remarkable 10.5% compounded annual growth rate over the last five years, higher than its 4.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Avnet’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Avnet’s operating margin declined this quarter but expanded by 1.6 percentage points over the last five years. Its share count also shrank by 12.7%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Avnet reported EPS at $0.84, down from $1.10 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Avnet’s full-year EPS of $3.85 to grow 32.5%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Avnet broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Avnet’s margin expanded by 1 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Avnet’s free cash flow clocked in at $114.1 million in Q1, equivalent to a 2.1% margin. The company’s cash profitability regressed as it was 5.9 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Avnet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.4%, somewhat low compared to the best business services companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Avnet’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

Avnet reported $188.9 million of cash and $2.83 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $791.4 million of EBITDA over the last 12 months, we view Avnet’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $249.6 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Avnet blew past analysts’ EPS and EBITDA expectations this quarter. On the other hand, its revenue and EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 7.3% to $47.50 immediately after reporting.

Updated: June 26, 2025 at 12:16 AM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Avnet.

We cheer for all companies making their customers lives easier, but in the case of Avnet, we’ll be cheering from the sidelines. To begin with, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its scale makes it a trusted partner with negotiating leverage, the downside is its low free cash flow margins give it little breathing room. On top of that, its operating margins reveal poor profitability compared to other business services companies.

Avnet’s P/E ratio based on the next 12 months is 10.2x. This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $51.25 on the company (compared to the current share price of $52.08).