IoT And Electrification Trends Will Reshape Outsourced Manufacturing

Key Takeaways

• Unique integration, global expansion, and operational efficiency position Flex for sustained segment growth, robust margins, and outperformance versus market expectations.
  
• Strategic regionalization, supply chain agility, and expanding digital service offerings drive structural revenue upside, durable customer relationships, and enhanced profitability.
  
• Rising protectionism, customer concentration, and industry shifts toward localization threaten Flex's cost structure, revenue growth, and profitability amid increasing operational and compliance risks.

Catalysts

Provides technology innovation, supply chain, and manufacturing solutions to data center, communications, enterprise, consumer, automotive, industrial, healthcare, industrial, and power industries.

• Analyst consensus sees Flex's data center business growing approximately 30 percent, but with significant hyperscaler diversification, unique integration of compute and power solutions, and continuous share gains globally, Flex could see sustained data center and power segment growth at rates above 35 percent annually for multiple years, compounding higher-than-expected revenue and driving robust operating leverage.
  
• While analysts broadly expect margins to benefit from higher value mix and vertical integration, Flex's relentless push for operational efficiency, record free cash flow, and accelerating value-added and service offerings could drive adjusted operating margins materially beyond 6.5 percent in the next two years, supporting EPS growth well above current forecasts.
  
• The company's uniquely extensive North American and EMEA manufacturing footprint, combined with proven expertise in supply chain agility, position Flex as the prime beneficiary of accelerating regionalization and tariff-driven supply chain shifts, opening new long-term contract opportunities and broadening the customer base, which is likely to deliver structural upside to revenue and margin stability.
  
• Flex is ideally situated to capture multi-year demand from global electrification, the EV and renewable energy wave, and large-scale IoT deployment, which-combined with increased outsourcing of complex electronics-should drive outpaced, durable growth in its automotive, health, and industrial segments, with meaningful expansion to sub-segments such as grid modernization and infrastructure, all supporting topline growth and higher net margins.
  
• The ongoing shift to outsourcing complex design, engineering, and lifecycle management services (beyond manufacturing) is accelerating, and Flex's early investment in digital platforms, automation, and lifecycle services is creating deeper customer relationships, more recurring revenue, and enhanced pricing power, directly translating to growing profitability, stickier revenue streams, and rising free cash flow.

Flex Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Flex compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Flex's revenue will grow by 4.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.2% today to 4.6% in 3 years time.
• The bullish analysts expect earnings to reach $1.4 billion (and earnings per share of $4.01) by about July 2028, up from $838.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, down from 23.4x today. This future PE is lower than the current PE for the US Electronic industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 5.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.15%, as per the Simply Wall St company report.

Flex Future Earnings Per Share Growth

Risks

• Deglobalization and rising protectionism, including tariffs and localization requirements, are increasing operational complexity and costs for Flex, potentially eroding its historical cost advantages and putting sustained pressure on net margins and operating profits in the long term.
  
• Flex faces customer concentration risk, with a heavy reliance on a small number of large cloud and hyperscaler customers; if any key customer reduces business, vertically integrates, or switches suppliers, revenue volatility may increase and long-term top-line growth may be negatively impacted.
  
• Broad industry trends toward localized, automated, and reshored manufacturing, particularly in North America and Europe, could reduce demand for outsourced manufacturing services, narrowing Flex's addressable market and further constraining revenue growth over time.
  
• Persistent commoditization of contract manufacturing and intensified price competition within the electronics manufacturing services industry threaten to squeeze profitability for Flex, which could hinder future net margin expansion and sustainable earnings growth.
  
• Increasing global labor and ESG compliance requirements are likely to lift costs and operational risks for Flex, introducing ongoing margin pressure and potentially increasing capital needs for compliance, with adverse effects on net earnings and return on invested capital.

Valuation

• The assumed bullish price target for Flex is $64.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Flex's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $64.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $29.7 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 8.1%.
• Given the current share price of $52.45, the bullish analyst price target of $64.0 is 18.0% 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.