Diodes Incorporated: Up Against Resistance (NASDAQ:DIOD)

Diodes Incorporated (NASDAQ:DIOD), a supplier of discrete semiconductors, has soared higher in the last month or so, helping it to greatly narrow losses for the year. This rally was in no small part assisted by a quarterly report that set records in a number of areas. However, the rally may be running out of steam with the stock up against resistance. Why will be covered next.

The rally may have stalled

The stock is currently down 17% YTD, which is actually better than most semiconductor stocks. For instance, the iShares Semiconductor ETF (SOXX) is down 30% in comparison. At the same time, it’s worth pointing out that as recently as November 3, DIOD was down 39% for the year. A strong rally in the last month or so helped close the gap.

The stock has gained 36% in value since then with most of the gains coming after November 7 when DIOD released its most recent earnings report. Prior to this, the stock was struggling to gain traction and recover from the big decline earlier in the year. The chart below shows how a strong rally in recent weeks has narrowed losses for the year.

However, the stock has struggled to keep it up in the last few days. It appears the stock has hit resistance. Notice how a channel can be formed by connecting the highs and the lows in the second half of the year. The stock has been able to move higher within this channel, but it is now at the upper bound of the channel. If the stock is to go higher, it will have to overcome resistance at the upper trendline.

While the stock could continue higher, a move lower is more likely if chart patterns are anything to go by. It may be a good time to consider taking some chips off the table with the stock close to resistance, especially with the stock having appreciated by a third in one month. The stock has come a long way in a relatively short amount of time and, while it could move higher for a bit longer, is probably due for a breather, if not more.

The trigger behind the recent rally

As mentioned earlier, almost all the recent gains came in the aftermath of the most recent earnings report and for good reasons. DIOD easily beat earnings expectations in what was a report to remember. In fact, revenue, gross margin, EBITDA, and non-GAAP EPS all reached record highs. Q3 revenue increased by 10.6% YoY to $521.3M. Automotive revenue was a standout once again, up 17% QoQ and 48% YoY to account for 16% of total revenue.

GAAP EPS increased by 25.3% YoY to $1.88 and non-GAAP EPS increased by 36% YoY to $2.00. EBITDA was $141.9M in Q3 FY2022, up from $130.6M in Q2 FY2022 and $114.5M in Q3 FY2021. Cash, cash equivalents, restricted cash and short-term investments on the balance sheet totaled $393M, partially offset by total debt of $296M. The table below shows the numbers for Q3 FY2022.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2022	QoQ	YoY
Revenue	$521.273M	$500.972M	$471.422M	4.05%	10.57%
Gross margin	41.8%	41.2%	38.4%	60bps	340bps
Income from operations	$112.446M	$106.238M	$77.247M	5.84%	45.57%
Net income (attributable to common stockholders)	$86.386M	$80.155M	$68.424M	7.77%	26.25%
EPS	$1.88	$1.75	$1.50	7.43%	25.33%
(Non-GAAP)
EBITDA	$141.938M	$130.646M	$114.524M	8.64%	23.94%
Net income	$92.175M	$86.902M	$67.284M	6.07%	36.99%
EPS	$2.00	$1.90	$1.47	5.26%	36.05%

Click to enlarge

Source: DIOD Form 8-K

Guidance calls for Q4 FY2022 revenue of $494M, plus or minus 3%, an increase of 2.9% YoY, but also a decline of 5.2% QoQ at the midpoint. Keep in mind that Q4 tends to be weaker due to seasonality. With $1,504.4M in revenue in Q1-Q3, FY2022 revenue is projected to end up at around $2B, which represents an increase of 10.8% YoY. In comparison, FY2021 revenue increased by 46.9% YoY to $1.81B.

Non-GAAP EPS is projected at $1.64 in Q4, an increase of $0.04 or 2.5% YoY and a decline of $0.36 or 18% QoQ. DIOD is projected to post non-GAAP EPS of $7.32 in FY2022 after earning $5.68 in Q1-Q3, which represents an increase of $2.14 or 41.3% YoY. In comparison, FY2021 non-GAAP EPS increased by 120% YoY to $5.18.

	Q4 FY2022 (guidance)	Q4 FY2021	YoY (midpoint)
Revenue	$494M +/- 3%	$480.2M	2.87%
GAAP gross margin	41.0% +/- 1%	39.7%	130bps

Click to enlarge

DIOD is inexpensive to own

DIOD is not only growing at a double-digit pace, but it is also not expensive to acquire. For instance, DIOD has an enterprise value of $4.17B, equal to about 8 times EBITDA on a forward and trailing basis. In comparison, the median for the sector is about 13x. The table below shows some of the multiples DIOD trades at.

	DIOD
Market cap	$4.16B
Enterprise value	$4.17B
Revenue (“ttm”)	$1,675.4M
EBITDA	$353.7M
Trailing GAAP P/E	13.84
Forward GAAP P/E	13.66
PEG ratio	0.23
P/S	2.09
P/B	2.98
EV/sales	2.10
Trailing EV/EBITDA	7.98
Forward EV/EBITDA	7.94

Click to enlarge

Source: Seeking Alpha

DIOD looks to be in good shape, but is it?

DIOD is growing, the stock has outperformed and it is relatively affordable. All these are solid arguments in favor of long DIOD. However, there are also a number of reasons why some may decide to be wary of DIOD. For starters, while DIOD has yet to see much of an impact, given recent quarterly earnings, the market for semiconductors is slowing down.

For instance, WSTS had earlier predicted the semiconductor market would grow by double digits, but the latest projections expect the market to grow by just 4.4% YoY to $580B in 2022, a year after the market grew by 26.2% YoY in 2021. Furthermore, the market is expected to shrink by 4.1% in 2023.

In terms of discrete semiconductors, which is the more relevant market segment for DIOD, the market is expected to grow by 12.4% in 2022. It grew by 27.4% in 2021 and it is expected to grow by just 2.8% in 2023. The market is slowing down fast, which does not bode well for suppliers of discrete semiconductors like DIOD.

It’s worth noting that some of DIOD’s competitors are already feeling the impact of a slowdown. For instance, the latest guidance from Vishay Intertechnology (VSH), a leading supplier of discrete semiconductors, was weaker than expected. DIOD itself has yet to be impacted, but it did acknowledge seeing some adjustments that could be early signs of a weakening in future demand. From the Q3 earnings call:

“Well, first of all, we don’t really forecast more than a quarter and provide guidance. I think what maybe I’ll just share my personal view over this. I think consumer computing and communications is definitely seeing a bigger adjustment. What I’m seeing is really more I call the inventory rebalancing. So over the quarters, the buildup of certain inventory, they need to adjust it and reset it. So with industrial and automotive we’ve been seeing some adjustments already. It’s not like we haven’t seen, but it just the scale is a little bit different.”

A transcript of the Q3 FY2022 earnings call can be found here.

It’s also worth mentioning that there has been some insider selling recently at DIOD. The table below shows some of the relevant transactions that have taken place.

Name	Title	Shares sold	Form 4
Lu Keh Shew	President & CEO	6,026	https://investor.diodes.com/sec-filings/sec-filing/4/0001209191-22-058329
Whitmire, Brett	CFO	3,436	https://investor.diodes.com/sec-filings/sec-filing/4/0001209191-22-057449

Click to enlarge

Executives have the right to sell some of their shares and them doing so does not necessarily imply anything negative about the company. Still, it could give some people pause, especially in combination with a stock at resistance and a slowdown in the semiconductor market.

Investor takeaways

Long DIOD certainly has a number of arguments in its favor. Unlike other semis that have seen their quarterly earnings take a dip due to weakening demand, DIOD is still growing strong. DIOD is projected to grow revenue by roughly 11% and non-GAAP EPS by 41% in FY2022. DIOD broke numerous records in its latest report. Multiples are very reasonable for a company growing as fast as it is.

While the stock has fallen in 2022, it has done much better than most semis with a drop of 17% YTD in what most would agree has been a difficult year for stocks, tech especially. The charts suggest the stock is in an uptrend. There is a strong case to be made as to why long DIOD is the way to go with all the above in its favor.

However, there are counterarguments to be made. It may only be a matter of time before DIOD is affected by weakening demand for semiconductors. While the market for discrete semiconductors may not be as bad off as say the memory market, growth is slowing down. It is expected to grow by double digits this year, but by next year, growth could be in the low single digits. DIOD itself is still doing well based on its quarterly earnings, but there’s no denying that the market environment it operates in is rapidly deteriorating.

DIOD has escaped the slowdown thus far, unlike other semis, but a major competitor, that also supplies much of what DIOD does, has been negatively affected by changes in market demand. Just because DIOD has yet to see a major deterioration in quarterly earnings does not mean it will stay that way. It’s possible for DIOD to outperform in a market downturn, but the fact that the market for discrete semiconductors is rapidly slowing down, which has already affected major competitors, is not an encouraging sign for DIOD. Neither are reports that high-ranking executives are selling some of their stock after the recent rally.

The charts also suggest the stock is due for a correction in the near term, having gained a third in value in about a month. The stock is close to the upper bound of the current uptrend and it seems to be having problems getting through resistance. It’s true the trend is still pointing up, but it may be a prudent move to take some chips off the table at this point with the stock at resistance and after the big move up in a short amount of time. I am neutral on DIOD for these reasons.

Bottom line, there are arguments to be made for and against long DIOD. It may be tempting to be long DIOD with so much in its favor, but it would be unwise to ignore what a growing number of companies, including direct competitors, are reporting about the state of the market. DIOD has yet to see problems, but it may be that those affected companies are simply ahead of the curve. Staying cautious is the way to go.