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Morningstar | IoT and Connectivity Trends Support Avnet’s Value-Added Leadership

Avnet is one of the world's largest value-added distributors of electronic components, such as interconnect, passives, and capacitors, and has a dominant position in the semiconductor market. The firm has been plagued with a handful of recent supplier losses, but we think it will rebound and still benefit from secular tailwinds such as the Internet of Things. We believe the firm will maintain its place near the top of the distributor pile due to its significant cost advantage over other broadline distributors, who may attempt to add their own value-added services, and suppliers, who may consider bringing such services in-house. Thus, we are upgrading Avnet’s moat rating to narrow.Avnet has focused on capturing market share earlier in the design chain and with a broader set of customers. Over the past two years, it has acquired catalog distributor Premier Farnell and its associated online network, Element14. Avnet has made similar moves to address the growing “maker” market by acquiring Dragon Innovation and Hackster.io, and by securing a partnership with Kickstarter. Through these investments, we think Avnet will have opportunities to accelerate growth in component sales and will be able to provide services spanning the entire product life cycle. After it opted to sell the technology solutions business, we believe the firm transitioned to a unique distribution model, with an opportunity to expand its customer base and then retain those same customers as they scale. We also expect the components distribution business to be less volatile than the broader semiconductor industry, owing to Avnet's expanding customer base of small to midsize electronic equipment manufacturers and as it addresses more end markets. Along with competitor Arrow, we believe Avnet has positioned itself well to benefit from broad-based demand for electronic content in a variety of consumer products, as well as automotive, medical, and industrial end markets, due to the growing need for connectivity and automation. Despite the loss of ADI and other supplier relationships, Avnet retains significant market share in electronic components distribution, which we expect to continue.