One of the breakout tech stocks this year has gone largely unnoticed, certainly compared to the “Magnificent Seven” and other artificial intelligence (AI) stock juggernauts. Yet Arrow Electronics (ARW +1.76%) has outperformed most of them, with a 104% year-to-date (YTD) return at the time of this writing.
Is it too late to buy Arrow, an electronics distributor that provides the components to support the AI boom — or does it have more room to run?
Image source: Getty Images.
A key cog in the AI supply chain
Arrow Electronics is an electronics distributor and consultancy that distributes semiconductor chips and components. The components are used in AI-enabled systems and devices across the automotive, medical devices, data centers, and aerospace and defense industries, as well as robotics and industrial applications. So, it is a supplier to the AI boom and a huge part of the supply chain.
Arrow also serves as an enterprise consultant, helping equipment manufacturers develop hardware and software strategies and AI solutions.
It is this shift from being just a middleman, distributing supplies, to being a partner to its customers, providing components and expertise to build their AI systems, that has sent Arrow stock into overdrive. AI computing systems are complex and hard to build, so Arrow’s Enterprise Computing Solutions (ECS) arm has filled a critical void, driving surging revenue.
In the latest quarter, revenue rose 39% year over year to $9.5 billion, while earnings jumped 201% to $4.55 per share, with adjusted earnings at $5.22 per share, up 190%. The components business accounted for $6.6 billion, while the growing ECS consultancy generated $2.8 billion in revenue.
The outlook for Q2 calls for overall revenue of between $9.15 billion and $9.75 billion. Adjusted earnings are anticipated to be $4.32 to $4.52 per share, down from Q1, but up 81% year over year. Management said it’s a normalization of earnings after a hyperscaler client accelerated a build-out in Q1.
Did you miss the boat on Arrow?
The strong quarterly results and the robust Q2 outlook took investors and analysts by surprise. It prompted several analysts to raise their price targets for Arrow, as they apparently did not expect such growth.
The results also caught investors’ attention, as the stock price has jumped about 15% since the May 7 earnings report. But even with the triple-digit spike in the stock price, Arrow Electronics still has plenty of juice left in it.
Today’s Change
(1.76%) $3.92
Current Price
$226.78
Key Data Points
Market Cap
$12B
Day’s Range
$221.00 – $227.99
52wk Range
$101.79 – $233.30
Volume
353.5K
Avg Vol
656.2K
Gross Margin
10.88%
It remains largely under the radar, with a price-to-earnings (P/E) ratio of just 16 and a forward P/E ratio of only 11. In addition, its five-year P/E-to-growth (PEG) ratio is only 0.35, indicating it is undervalued relative to long-term earnings growth expectations.
Truist raised its price target twice in the past two months by a total of $77 per share, to $260 per share. That would suggest 16% upside.
Bank of America boosted its price target by $111 to $233 per share, and I would not be surprised to see another bump.
If you missed the boat on Arrow Electronics this year, you can still hop on board, as it’s priced to move higher.
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