North American Cloud And AI Data Centers Will Foster Success

Key Takeaways

• Flex's EMS plus Products plus Services strategy prioritizes high-value vertical integration, enhancing margins and boosting earnings.
  
• Strategic expansions in the U.S. and Mexico benefit from regionalization trends, with potential revenue and margin improvements.
  
• Tariff changes, market headwinds, and competition in AI may impact Flex's revenue growth, operating margins, and investor perceptions of performance.

Catalysts

Provides manufacturing solutions to various brands in Asia, the Americas, and Europe.

• Flex is executing its EMS plus Products plus Services strategy, prioritizing high-value businesses and more vertical integration, which is expected to drive margin accretive growth. This strategy will likely enhance operating margins and boost earnings.
  
• The company's data center business, which includes cloud and power sectors, is forecasted to grow by around 30% in FY '26. This growth, driven by acquisitions and new capabilities, should significantly boost revenue and operating profits.
  
• Flex's extensive North American footprint, particularly its strategic expansions in the U.S. and Mexico, positions it to benefit from trends towards regionalization. This operational advantage may result in increased revenues and possibly improved margins.
  
• Flex is leveraging its technological synergy in integrating compute and power, positioning it uniquely in the AI data center ecosystem. This convergence could result in revenue growth and margin improvement as they capitalize on this niche market.
  
• Continued focus on operational efficiency and portfolio management, with the goal of sustained adjusted operating margins above 6%, targets growth beyond revenue, enhancing earnings per share and overall shareholder value.

Flex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Flex's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $3.49) by about May 2028, up from $1.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 13.9x today. This future PE is lower than the current PE for the US Electronic industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 4.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

Flex Future Earnings Per Share Growth

Risks

• Tariff fluctuations could result in increased costs and cash flow timing issues if there's a lag between payment and recovery from customers, potentially affecting net margins.
  
• Macro-driven headwinds may lead to softness in core industrial, renewables, and automotive markets, impacting revenue growth.
  
• If customer-sourced inventory models continue to grow, revenue growth may appear muted despite robust operational performance, potentially affecting investor perceptions.
  
• There is a risk of operational inefficiencies and lower fixed cost absorption due to expected lower sequential revenue, impacting operating margins in the short term.
  
• Increased competition or changes in demand in the evolving AI data center ecosystem could affect the company's ability to maintain current revenue growth and profit margins in strategic areas like cloud and power products.

Valuation

• The analysts have a consensus price target of $44.154 for Flex based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $52.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $27.8 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $36.77, the analyst price target of $44.15 is 16.7% higher.
  
• 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.