Data Center Demand And AI Infrastructure Will Spark Future Opportunity

Key Takeaways

• Accelerating demand for AI infrastructure and strategic investments in high-margin verticals are shifting revenue mix toward greater stability and long-term earnings growth.
  
• Regionalized manufacturing, automation, and integrated solutions are differentiating Flex, enabling supply chain resilience and improved margins versus competitors.
  
• Heavy reliance on a few major clients and thin margins make Flex vulnerable to client loss, industry shifts, and the growing trend of customer in-house manufacturing.

Catalysts

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

• The ongoing surge in demand for data center and AI infrastructure-requiring integrated power, cooling, and advanced IT hardware-positions Flex for sustained, outsized revenue growth, as evidenced by the 35% forecasted annual increase in its data center segment, supporting both topline expansion and higher portfolio margins.
  
• Flex's global manufacturing footprint, especially its ability to regionalize and rapidly scale production across North America and Europe, aligns with accelerating customer efforts to de-risk and diversify supply chains. This strategic positioning is likely to drive incremental customer wins and increase future revenues.
  
• The company's deployment of AI-enabled systems and advanced automation across its facilities is delivering meaningful productivity gains, which should support ongoing operating margin expansion and improve long-term earnings potential.
  
• Continued investments in higher-growth, higher-margin verticals such as healthcare, automotive (especially as EV and electronic content grows), and networking-alongside strategic acquisitions like the new Poland facility-are shifting Flex's revenue mix toward greater stability and margin accretion, likely supporting higher future ROIC and earnings growth.
  
• Flex's transition from traditional contract manufacturing to providing integrated, IP-driven solutions (especially in cloud/power integration and AI infrastructure) will deepen customer relationships, increase differentiation versus competitors, and unlock new higher-value revenue streams, enhancing both gross margins and earnings long-term.

Flex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Flex's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 4.6% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $3.54) by about September 2028, up from $891.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, down from 23.7x today. This future PE is lower than the current PE for the US Electronic industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 3.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.71%, as per the Simply Wall St company report.

Flex Future Earnings Per Share Growth

Risks

• Ongoing customer concentration risk is highlighted by the company's reliance on a small set of hyperscaler and colo data center clients, meaning the loss or insourcing by any of these major customers (as hinted at in Amazon's move to internally designed cooling solutions) could significantly impact Flex's future revenue stability and earnings visibility.
  
• Structural thin operating margins across Flex's business-despite current improvements-leave little buffer to absorb unexpected cost pressures, industry price competition, or commoditization of manufacturing services, thereby risking long-term net margin sustainability and overall profitability.
  
• Continued macro-related weakness and cyclicality in key end markets such as automotive, core industrial, and consumer-facing products expose Flex to volatile demand patterns-even as current guidance remains unchanged-which could undermine future revenue growth and earnings if cyclical downturns persist or intensify.
  
• Flex's positive commentary on automation and AI-driven manufacturing also indicates the necessity for ongoing substantial capital investment to maintain competitiveness; however, as automation technology becomes more widespread, it may erode Flex's traditional labor-cost advantages, pressure margins, and require further investments to avoid obsolescence, potentially impacting long-term EBIT margins and capital returns.
  
• The increasing trend of customers (hyperscalers and otherwise) evaluating in-house manufacturing for critical components such as power and cooling (as flagged by recent market moves) signals a risk of vertical integration by major OEMs, which could reduce Flex's total addressable market and create topline headwinds that affect future revenue and growth prospects.

Valuation

• The analysts have a consensus price target of $57.857 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 $65.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.1 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 8.7%.
• Given the current share price of $56.2, the analyst price target of $57.86 is 2.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.