Up only around 10% from its low in March 2020, at the current price near $62 per share, we believe Mercury Systems stock (NASDAQ: MRCY) has strong upside potential. Mercury Systems stock has risen from $60 to $64 off the recent bottom, a lot less than the S&P which increased by around 80% from its lows. Further, the stock is down around 25% from the level it was at before the pandemic. However, we believe that Mercury Systems stock could regain its April 2021 high of $80, rising 25% from its current level, driven by expectations of continuing demand growth, and strong Q3 2021 earnings. Our dashboard What Factors Drove 35% Change In Mercury Systems Stock Between 2018 And Now? has the underlying numbers behind our thinking.
The stock price rise since 2018-end came due to a 62% rise in revenue from $493 million in FY 2018 to $797 million in FY 2020. Net margins rose from 8.3% in 2018 to 10.8% in 2020, and despite an 18% rise in the outstanding share count, EPS (earnings-per-share) rose from $0.88 in FY 2018 to $1.57 in FY 2020.
Mercury Systems’ P/E (price-to-earnings) multiple rose from 54x in 2018 to 56x by 2020 end, but has since dropped to 41x. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of coronavirus and the resulting lockdowns in early 2020 affected semiconductor technology demand across a variety of industries. However, with conditions improving, demand is recovering steadily. This is evident from Mercury Systems’ Q3 2021 earnings, where revenue jumped to $257 million vs $208 million for the same period in FY 2020, a jump of 1.3x. However, rising COGS and operating expenses saw operating margins fall to 8.5% from 12.7%. This led to EPS dropping to $0.28 from $0.43 over this period.
Further, demand growth is expected to continue in the medium term, driving demand for Mercury Systems’ products even higher. Additionally, with the lockdowns being lifted and manufacturing capacity rising back to pre-pandemic levels, we believe the company will see additional revenue and margin growth. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Mercury Systems’ stock can rise around 25% from current levels, to regain its recent highs of $80.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
