Latest Developments:
Avnet (AVT) reported 1Q25 revenues of $5.6 billion, showing a modest 0.74% quarter-on-quarter growth but a year-on-year decline. While revenue exceeded estimates, margins have significantly deteriorated, with gross margin falling to 10.83% from 11.81% and net margin shrinking to 1.05% from 3.30%. The company faces challenges from a global demand slowdown and a competitive landscape exacerbated by the merger of WT Microelectronics and Future Electronics.

Investment Case:
Despite a positive performance in Asia, Avnet's financial outlook remains weak. Demand for electronic components is sluggish, reflected in elevated inventory levels, signaling slow sales. The company's Farnell segment continues to underperform, contributing only 1.1% to operating income. The recent merger in the industry is adding pressure, as WT Microelectronics now competes directly with Avnet on a global scale. These factors, coupled with a deteriorating market environment, lead us to believe that Avnet’s upside potential is limited.

Company's Valuation:
Valuation analysis shows that Avnet is overly optimistic, with a DCF model indicating a 10.8% CAGR priced into the stock. A more conservative approach, factoring in a revenue decline in FY2025, suggests a 25% downside potential, with an implied share price of $41.

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