AI servers and iPhone Duo work together, Hon Hai's Q3 profit exceeded expectations, but the Nvidia crisis raised concerns
The Zhitong Finance App learned that Hon Hai Precision announced on Thursday that net profit for the third quarter ending September increased 34% year on year to NT$77.5 billion (about US$2.4 billion), exceeding analysts' average expectations of NT$70.3 billion, and sales increased 47%. Driven by the explosion in demand for AI servers and strong consumer demand for the high-end iPhone Duo, the company's performance once again outperformed market expectations.
However, as Nvidia (NVDA.US) CEO Wong In-hoon is mired in a scandal and the prospects for AI infrastructure investment have raised questions, the stock price of Hon Hai, Nvidia's main server assembly partner, has dropped more than 20% from its June high.
AI servers become the biggest growth engine
Hon Hai is Nvidia's main server assembly partner. Assembling AI servers equipped with Nvidia GPUs (including next-generation Rubin chips) has become the biggest driving force for the company's growth, helping it get rid of its traditional dependence on consumer electronics products.
Liu Yangwei, chairman of Hon Hai, said in October that the company's goal is to take half of the AI server market within two years and increase gross margin to about 10% by producing more high-value components.
Analysts Steven Tseng and Sean Chen pointed out that based on monthly disclosure data, Hon Hai's third-quarter revenue is expected to surge 47% to a record NT$3.03 trillion, up 20% month-on-month, with cloud and network businesses leading the way, thanks to continued shipments of Nvidia's GB series AI server racks, rising spending on hyperscale cloud vendors, and capacity expansion. The increase in the share of high-value AI servers will continue to dilute gross profit margins, but selective adoption of consignment arrangements is expected to ease the pressure; operating leverage brought about by increased AI server shipments, combined with increased automation and vertical integration, should support profit growth and offset gross margin dilution.
The Nvidia scandal poses potential risks
Hon Hai is one of Nvidia's key suppliers and is now facing the potential impact of the Wong In-hoon scandal. The report said that Hwang In-hoon had many extramarital affairs. As a result, the Nvidia CEO is under pressure. As a result, the market is questioning the prospects for large-scale AI infrastructure construction around the world — and this construction is being driven to a certain extent by Nvidia's support.
Investors' concerns about the intensity of AI construction are heating up: the debt-driven data center industry is showing signs of pressure, large AI developers still need to prove that they can achieve sustainable profits, and the capital expenditure growth rate of hyperscale cloud vendors is expected to slow down after years of rapid expansion. Hon Hai's stock price has fallen by more than 20% from its June high, and its market value has shrunk to slightly more than 100 billion US dollars.
iPhone Duo provides additional support to electric vehicle business
In addition to AI servers, Hon Hai is also benefiting from the steady demand of high-end smartphones such as the Apple (AAPL.US) folding screen iPhone Duo. Apple called the device's initial market response “extraordinary.” Hon Hai (better known as Foxconn) helped Apple assemble the device and the iPhone 18 series at factories in China and India.
At a time when global smartphone shipments are hovering at their lowest level since 2013, both Apple and Hon Hai are counting on high-end products such as the iPhone Duo to boost profit margins. The agency predicts that the iPhone Duo may sell as many as 16 million units by September next year.
Furthermore, over the past three months, Hon Hai has deepened its layout in the electric vehicle industry and agreed to buy 50% of Mitsubishi Electric's auto parts business for 727 million US dollars.