Tariff Risks And Supply Chain Woes Will Shadow AI Servers

Key Takeaways

• Margin pressures are mounting due to rising costs, fragmented supply chains, and a shift to lower-margin, next-generation AI servers amid fierce competition.
  
• Heavy reliance on hyperscale cloud customers and limited value chain control heightens vulnerability to shifts in client procurement strategies and regulatory pressures.
  
• Strong demand for AI and cloud servers, flexible global manufacturing, and expansion into higher-margin products position Quanta for stable growth and sustained profitability amid industry change.

Catalysts

Manufactures, processes, and sells laptop computers and telecommunication products in the United States, Mainland China, the Netherlands, Japan, and internationally.

• The relentless build-out of data center infrastructure by cloud service providers is driving unpredictable, short-term surges in server orders, but this front-loading of demand-exacerbated by tariff uncertainties and supply chain fragmentation-risks a pronounced slowdown or normalization in the second half of the year and beyond, exposing revenues to heightened volatility and diminishing long-term growth stability.
  
• As labor costs in manufacturing hubs continue to increase, and global supply chains fragment due to geopolitical tensions, Quanta is forced into expensive capex cycles and site relocations across the U.S., Mexico, Southeast Asia, and Europe. This will erode operational efficiency and further compress net margins as ongoing cost inflation outpaces any scale advantages.
  
• Margin pressure is set to intensify as the competitive server market pushes Quanta further into high-value AI servers, but the mix shift comes with higher working capital requirements, lighter margin on next-generation product ramps, and rising R&D and interest expenses. Gross and net margin expansion will be increasingly difficult to sustain, especially as product differentiation remains limited and commoditization accelerates.
  
• Overreliance on a concentrated customer base in hyperscale cloud and insufficient proprietary control within the value chain leaves Quanta exceptionally vulnerable to any shift in customer procurement strategies, including the risk that large technology companies further their in-house or vertically integrated manufacturing. This exposes long-term earnings and revenue to significant downside volatility.
  
• Stricter global environmental and sustainability mandates will drive the need for extensive upgrades and investments in cleaner manufacturing capabilities. This adds incremental operating and capital costs that threaten future profitability, at a time when Quanta's inventory and receivables are already elevated and working capital strains are at historic highs.

Quanta Computer Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Quanta Computer compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Quanta Computer's revenue will grow by 23.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 4.1% today to 2.9% in 3 years time.
• The bearish analysts expect earnings to reach NT$89.7 billion (and earnings per share of NT$23.13) by about June 2028, up from NT$67.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 16.4x today. This future PE is lower than the current PE for the TW Tech industry at 19.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Quanta Computer Future Earnings Per Share Growth

Risks

• Robust global demand for AI servers and hyperscale cloud infrastructure, supported by record-breaking server sales (with servers comprising 65%-70% of Quanta's revenue and AI servers over 60% of server sales), suggests strong long-term revenue growth, as the company's major clients continue heavy investment in AI compute and data centers.
  
• Quanta's ability to rapidly expand and relocate global manufacturing, particularly in response to tariff risks and customer needs (with flexible capacity in Mexico, U.S., and Asia), gives it resilience against geopolitical uncertainties and positions it to maintain operational efficiency and stable margins.
  
• Ongoing investment in high-value, higher-margin product lines-such as advanced automotive electronics, next-generation AI servers, and healthcare technology-indicates potential for long-term earnings expansion and margin improvement as these segments scale.
  
• Demonstrated operational leverage and prudent cost management, as evidenced by record profits and operating margins, show Quanta is effectively controlling expenses and leveraging R&D to stay ahead, which supports sustained profitability even in the face of industry volatility.
  
• A track record of strong client relationships, rapid design-to-production cycles, and adaptability to evolving technology requirements with leading hyperscale customers gives Quanta ongoing share gain opportunities and deepens its competitive moat, pointing to continued earnings growth and shareholder returns.

Valuation

• The assumed bearish price target for Quanta Computer is NT$195.66, which represents two standard deviations below the consensus price target of NT$329.1. This valuation is based on what can be assumed as the expectations of Quanta Computer's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$420.0, and the most bearish reporting a price target of just NT$100.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NT$3054.1 billion, earnings will come to NT$89.7 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of NT$285.5, the bearish analyst price target of NT$195.66 is 45.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.