April 23, 2024

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Hon Hai jumps at its highest rate in years after strong expectations for artificial intelligence

Hon Hai jumps at its highest rate in years after strong expectations for artificial intelligence

(Bloomberg) — Shares of Hon Hai Precision Industry Co. The biggest intraday jump in more than three years after the company forecast strong growth for sales of artificial intelligence devices this year.

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The Taiwanese company expects its AI server business to grow 40% this year and is targeting a 40% share of that market overall, Chairman Yong Liu said on an earnings call Thursday. The company, also known as Foxconn, reported strong earnings growth for the second straight quarter after profitable AI hardware sales helped offset weakness in demand for the iPhone and consumer electronics.

Shares jumped as much as 9.5% in Taipei on Friday, extending their rise since the start of this year amid growing optimism about Foxconn's opportunity to capitalize on demand for artificial intelligence. The world's largest assembler of Apple Inc's iPhones was not. It is among the initial group of companies boosted by the AI ​​craze, but investors and analysts say it is likely to gain an increasing share. This month, it reportedly secured a major order from long-time US partner Hewlett Packard Enterprise Co.

Morgan Stanley and Citigroup Inc. UBS Group AG upgraded its price targets for Hon Hai after the company reported a 33% increase in net income to NT$53.2 billion ($1.7 billion) in the quarter ended December.

“The company's competitive strength in providing a comprehensive solution (including liquid cooling and switches) through vertical integration should position it well for more project wins,” Citi analysts Carrie Liu and Michael Hong wrote after the results.

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For the current period, Hon Hai expects that sales will decline again, as they come from a high comparative base from the post-pandemic recovery period early last year. AI sales have helped it improve its profits while beating last year for the iPhone, the flagship product that first brought Foxconn global fame.

“The business saw a good sequential rebound in the fourth quarter driven in part by the AI-focused side, but if you take a step back and look at 2023 as a whole, it was a relatively weak year,” Bloomberg Intelligence analyst Robert Lea said. “The company should now have a much better year as its key customers begin to rebuild inventory.”

JPMorgan said earlier this week that Foxconn's rally could extend as the market increasingly bets on the company's prospects in AI server infrastructure from the second half of the year. Analysts, including Gokul Hariharan, estimate that Hon Hai's AI revenue and gross profit will likely be in the 10-12% range in 2025.

However, with Apple accounting for more than half of Hon Hai's revenue, challenges remain. This month, Counterpoint Research said iPhone sales in China fell a surprising 24% during the first six weeks of this year. To stimulate demand, Apple rolled out rare discounts on its online store in January, and online sellers are now cutting prices by up to $180.

–With assistance from Abhishek Vishnoi.

(Updates with analyst reaction and chart)

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