Baird raises Diodes stock rating, cuts price target to $50

On Monday, Baird analyst Tristan Gerra upgraded Diodes Incorporated (NASDAQ:DIOD) stock from Neutral to Outperform, while also reducing the price target to $50 from the previous $72. Gerra highlighted several indicators that suggest a more positive outlook for the semiconductor industry, particularly for companies like Diodes that have managed pricing effectively during the previous upcycle. This analysis comes at a crucial time for the sector, as industry leader Texas Instruments (NYSE:NASDAQ:TXN) trades near its 52-week low of $150.96, with InvestingPro data showing an industry-wide reassessment of valuations.

Lead times for semiconductors, which indicate the time between ordering and delivery, have returned to normal levels in the second half of 2024. This normalization is typically a mixed signal for the industry, as it can foreshadow a downturn due to declining lead times, yet it also allows for an increase in shipments to meet demand. Despite this, Gerra notes that semiconductor stocks often rebound prematurely during this phase, even as inventory levels remain high.

The analyst also pointed out that pricing for cyclical components, such as microcontrollers (MCUs), analog, and passive components, have retraced significantly from their peak in 2022. This follows a period where certain commodity analog products and MCUs saw price increases of over 10% in each quarter of 2021. Additionally, capital expenditures in the industry have decreased from their peak, with Texas Instruments being a notable exception, despite its revenue declining 10.72% over the last twelve months according to InvestingPro data. The company maintains strong fundamentals with a current ratio of 4.12, indicating robust liquidity. However, capital intensity is expected to decline starting in 2026.

Utilization rates, which measure the percentage of manufacturing capacity in use, are currently at what Gerra contends are historical lows, having bottomed in the first quarter of 2025. This is seen as a positive sign, indicating that a rebound may be on the horizon. Furthermore, operational expenditure reductions have been announced, which is typically indicative of a severe cyclical downturn.

The report mentions that inventory days, which measure how long a company holds inventory before selling it, are approaching normalization, with full normalization expected by the end of the year. This metric is generally the last to hit its trough in a cycle. Notable inventory improvements have been observed in the mobile phone and automotive segments.

Lastly, Gerra notes that valuations for some analog companies have moved to a price-to-book basis, suggesting limited earnings visibility for the coming year, a valuation method common in highly cyclical segments like memory.

The upgrade of Diodes to Outperform reflects Baird’s expectation of a cyclical recovery in the semiconductor industry, as evidenced by several "green lights" in key indicators.

In other recent news, Texas Instruments reported a revenue of $4.00 billion, surpassing Stifel’s estimate of $3.85 billion, primarily due to strong performance in the Personal Electronics sector. However, the company’s outlook for the first quarter of 2025 indicates a slight sequential revenue decline, with a midpoint estimate of $3.90 billion. Benchmark analysts reiterated a Buy rating with a $230 price target, despite a mixed outlook for the March quarter, noting the company’s high internal inventory levels as a strategic advantage. Citi analysts also maintained a Buy rating, with a $235 target, highlighting Texas Instruments’ capital expenditure plans and potential for analog inventory replenishment. Truist Securities kept a Hold rating with a $195 target, emphasizing the company’s steady capital management strategy amid a multiyear investment cycle.

Additionally, Texas Instruments unveiled the world’s smallest microcontroller, the MSPM0C1104, designed for compact applications without sacrificing performance. This development is part of the company’s efforts to enhance its semiconductor solutions and expand its production capabilities. Stifel analysts maintained a Hold rating with a $200 target, acknowledging challenges in the Industrial and Automotive sectors but expressing optimism for recovery later in the year. The company’s ongoing investments in manufacturing capacity aim to support future demand and improve its position in the datacenter end market.

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