TD SYNNEX (SNX)

A boring bet on tech

TD SYNNEX Corporation (SNX)

Price: $113.48

Fully-Diluted Shares Outstanding: 85.46M

Market Cap: $9.7B

Enterprise Value: $13.1B

TD SYNNEX is the leading global distributor and solutions aggregator for the information technology (IT) ecosystem. As a critical player in the tech industry, serving over 150,000 customers across 100+ countries and partnerships with 2,500+ technology vendors, TD SYNNEX bridges the gap between world-class technology vendors and the market, enabling its customers to create tailored solutions that drive optimal business outcomes for end-users. 

High barriers to entry, manageable working capital, variable cost structure, consistent cash generation, and solid capital allocation have led to the company’s success. The stock trades at a ~10% free cash flow yield, allowing risk-averse investors to participate in the AI revolution.

The business is comprised of three segments:

Endpoint Solutions Portfolio – Devices and peripherals, mobile phones and accessories, printers, supplies, etc.

Advanced Solutions Portfolio – Hyperscale infrastructure, cloud, servers, networking, and storage.

Strategic Technologies – Artificial intelligence, data, and security (spans both endpoint and advanced solutions)

Leading vendors: Apple, Inc., Cisco Systems, Inc., Dell, Inc., Hewlett-Packard Enterprise Company, HP Inc., International Business Machines Corporation, Lenovo Group Ltd., Microsoft Corporation, and Samsung Electronics Co., Ltd. Apple is the only company with products responsible for more than 10% (11%) of TD Synnex’s revenue.

The company provides these vendors access to large and highly fragmented markets such as small- and medium-sized businesses. It serves as a variable, cost-effective route to market for vendors by providing them access to resellers and end-users. 

TD Synnex offers an essential value proposition to the IT ecosystem through its immense scale and efficiency. Big tech companies can outsource distribution/logistics to TD Synnex while they craft their wizardry (and keep their margin).

Hear it from Buffett, who made an offer for Tech Data in 2019 (before the merger with Synnex), but was outbid by Apollo: “It’s not a business that you can dream about. It’s a decent business. For example, for many of the items, the manufacturers just don’t want to tie up their capital. If you have a million-plus SKUs, it’s like selling jelly beans or something like that," Buffett said. "You’re serving a purpose to a degree, but it isn’t your product, in effect. You’re just a good system for the producer of the equipment to get it to the end user without tying up a lot of capital being in a business they don’t want to be in. We understand, but there’s no magic to it”.

Indeed, their service is not arcane but is increasingly important. As technology evolves and becomes more competitive, vendors' ability to reach the market and gain scale is paramount. TD Synnex is well positioned to capitalize on the growth of technological innovation, which has shown up in its financials. Their strategic technologies solutions category has grown 15% y/y and has shifted from 17% of gross billings in 2021 to 25% today. The company’s successful adaptation has led to a significant boost in gross margins, increasing from 5.6% to 7.0% over the past few years. This trend will continue as companies need sufficient AI capabilities to maintain their competitive positions. Meta Platforms, Google, and Microsoft, once capital-light businesses, investing a combined $24 billion into their enterprises five years ago, have now plowed over $150 billion this year; capital expenditures are three times greater than depreciation expense.

Notable developments (Q2’24 Investor Presentation):

– Launched IBM® watsonx™ Gold 100 Program to accelerate AI opportunities for partners, including enablement and training resources, business planning, marketing, demand generation, expert services and pre-sales support.

– Received Microsoft’s Global Copilot Seats Champion Award for Q3 FY24 following successful channel launch activities.

– Named a design partner for NVIDIA’s HGX product line, allowing Hyve to offer solutions optimized for H100, H200 and Blackwell GPUs and announced the integration of Intel® Xeon® 6 processors into Hyve-designed motherboards and systems.

Obsolescence risk is low. The middleman will be needed for years to come.

Cash generation:

A concern is balance sheet risk from pricing pressure, risk of disruption, and being left with defunct inventory during an economic slowdown. However, TD Synnex has excellent relationships with their vendors, often referring to them as partners, and benefits from price protection guarantees, return rights, and accounts payable outpacing inventory. This has allowed TD Synnex to be countercyclical, with significant cash generation during the dot com bubble, great financial crisis, and COVID-19 pandemic. 

In FY 23, they produced $1.2 billion in free cash flow, bought back $630 million in stock, and issued a $130 million dividend. In the last twelve months, TD Synnex has generated $900 million in free cash flow, all going towards share repurchases, plus another $130 million in dividends. Management has been adamant about capital returns and guides to $1.5 billion + of free cash flow in the medium term, rewarding shareholders with half (predominantly buybacks) and the remainder towards strategic investments and M&A.

Debt:

$700 million of 1.25% senior notes due August 2024

$700 million of 1.75% senior notes due 2026

$600 million of 2.375% senior notes due 2028

$500 million of 2.65% senior notes due August 2031

$600 million of 6.1% senior notes due April 2034

$581 million term loan at 6.8% due September 2026

$750 million term loan at 6.7% due September 2027

$160 million in short-term borrowings at 5.93% as of May 2024

They should be able to service this debt. Additional liquidity includes $1.1 billion of cash, a $3.5 billion unsecuritized revolver, and $1.5 billion in A/R securitization. 

Net debt ($3.4B)/EBITDA ($1.7B) = 2.0x

Glenn Greenberg:

“If you could buy a decent — not great, but decent — quality business with a 10% free cash flow yield, my experience is that you would not lose money. A decent business is going to grow – maybe not really fast, but if you can start out with a 10% free cash flow yield and it is going to grow at some modest rate, 3-4%, you are going to end up with a pretty decent investment – a theoretical 13-14% rate of return. Think about how that compares with what anyone says the market can offer over a given period of time, which is between 7-8%”.

Greenberg runs Brave Warrior Advisors and is a legend. He partnered with John Shapiro and founded Chieftain Capital Management in 1984. They handily outperformed the market until disbanding in 2009. 

Brave Warrior has a track record of buying simple, predictable, cash-generative businesses with ample staying power. Allan Mecham of Arlington Value Management, posting hall-of-fame returns until 2020, recommended his investors to Greenberg after he shut down his operation.

Brave Warrior bought TD Synnex stock in Q1 2024, accounting for 7.24% of the fund, and is the sixth largest holding. The stock is down ~15% from its 52-week high. Currently trading at a ~10% LTM free cash flow yield, with EPS compounding at ~5% for the past decade, TD Synnex provides a theoretical 15% return. TD Synnex’s most recent investor presentation guides to 15-20% total stock returns. Greenberg likely makes the stock a more significant position over time.

Brave Warrior has owned TD Synnex since Q3 2021 from their Apollo holding. Greenberg bought Apollo as a core position, which doubled, and he recently sold about half his stake. In 2019, Apollo bought TD in an all-cash deal and owned 45% of TD Synnex when the merger was completed in 2021, but it has exited its position in the company over the last year. The alternative asset management giant is freeing up capital to ride the private credit tidal wave, yet Greenberg finds the tech dealer a more lucrative bet.