Executive Summary / Key Takeaways

• AI Data Center Transformation: Flex's data center revenue surged 50% year-over-year to $4.8 billion in fiscal 2025, representing 25% of total revenue and targeting $6.5 billion in fiscal 2026. This shift toward high-margin power, cooling, and systems infrastructure is fundamentally altering the company's earnings profile.

• Regionalization as Margin Driver: The company's strategic pivot from Asia to North America—growing Americas revenue from 38% in fiscal 2020 to 49% in fiscal 2025—creates a durable competitive moat in an era of tariffs and supply chain reshoring, while supporting operating margin expansion above 6%.

• Unique "Grid to Chip" Positioning: Flex is the only provider offering end-to-end cloud IT integration combined with a full power and cooling portfolio at scale. This integrated architecture commands premium pricing and creates significant switching costs for AI infrastructure customers.

• Operational Resilience Tested: The $41 million Ukraine facility impairment and ongoing tariff headwinds demonstrate Flex's ability to absorb geopolitical shocks while maintaining guidance, validating the strategic value of its diversified 48 million square foot global footprint.

• Valuation Disconnect: Trading at 19.2x price-to-free-cash-flow with an 80%+ cash conversion rate, Flex trades at a meaningful discount to AI-exposed peers despite superior margin expansion and a multi-year growth runway in data center infrastructure.

Setting the Scene: From Contract Manufacturer to AI Infrastructure Architect

Flex Ltd., founded in 1969 and headquartered in Singapore, has spent five decades evolving from a traditional electronics manufacturing services (EMS) provider into something far more valuable: a critical enabler of the AI infrastructure build-out. The company's transformation accelerated in 2020 with the "Flex Forward" strategy, a deliberate pivot away from low-margin consumer electronics toward higher-value businesses. This wasn't a cosmetic rebranding—it involved aggressive portfolio management, operational innovation, and a fundamental rethinking of what an EMS company could become.

The EMS industry has long been characterized by a focus on revenue scale and cost efficiency, often at the expense of profitability. Flex recognized that this model was becoming commoditized, particularly as Asian labor costs rose and supply chains grew more fragile. The company's response was the "EMS + Products + Services" strategy, which leverages advanced manufacturing and supply chain capabilities while adding proprietary products and expanded value-added services. This creates a vertically integrated model that captures more value per customer relationship and generates superior returns on invested capital.

Flex's competitive positioning reflects this evolution. The company now competes directly with traditional EMS peers like Jabil (JBL), Celestica (CLS), and Sanmina (SANM), but with a critical differentiation. While these competitors focus primarily on assembly and logistics, Flex has built a unique capability spanning from grid-level power infrastructure to chip-level cooling solutions. AI workloads require 5-10 times more power density than traditional computing, creating demand for integrated solutions that pure-play manufacturers cannot provide. The company's global footprint of over 48 million square feet, including 7 million square feet across 17 U.S. facilities and 9 million square feet in Mexico, establishes one of North America's largest advanced manufacturing presences—a strategic asset in an era of regionalization.

Technology, Products, and Strategic Differentiation: The "Grid to Chip" Architecture

Flex's core technological advantage lies in its comprehensive data center architecture that spans the entire power and cooling stack. On the cloud side, the company delivers vertically integrated IT hardware and infrastructure solutions, including metal fabrication, custom rack assembly, and direct-to-chip liquid cooling technology. On the power side, solutions range from board-level modules managing power to the chip, up to facility-level modular power pods. This end-to-end integration is not merely a product catalog—it represents a fundamental rethinking of data center design for the AI era.

The strategic importance of this integration became clear with the August 2025 introduction of a new power shelf for the NVIDIA (NVDA) GB300 NVL72 data center power infrastructure. This collaboration with NVIDIA, announced in October 2025 to expedite giga-scale AI factory rollout, validates Flex's position as a strategic partner rather than a commodity supplier. The partnership locks in Flex's technology roadmap with the dominant AI compute provider, creating a multi-year revenue stream as hyperscalers upgrade their infrastructure.

The September 2025 acquisition of JetCool for direct-to-chip liquid cooling capabilities and the prior acquisition of Crown Technical Systems for $325 million demonstrate Flex's commitment to building a defensible moat. JetCool's technology enables substantially improved thermal efficiency—qualitatively 30% better heat dissipation—while Crown provides modular solutions for medium voltage switchgear, control, and relay. These acquisitions transform Flex from a contract manufacturer into a technology owner, capturing higher margins and creating switching costs. Customers designing AI clusters around Flex's cooling and power architecture cannot easily substitute alternative suppliers without redesigning their entire facility.

The November 2025 partnership with LG to develop advanced thermal management solutions further strengthens this position. By collaborating with a leading electronics manufacturer, Flex accelerates innovation while maintaining its role as the system integrator. The company's AI infrastructure platform, designed to accelerate deployment by up to 30%, creates a compelling value proposition for data center operators facing capacity constraints. Speed-to-market has become a critical competitive differentiator, and Flex's integrated approach eliminates the complexity of coordinating multiple vendors.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

Flex's second quarter fiscal 2026 results provide clear evidence that the transformation strategy is working. Revenue of $6.8 billion grew 4% year-over-year, modest on the surface but impressive given significant headwinds. More importantly, gross margin improved 80 basis points to 9.3% and adjusted operating margin reached 6.0%—the fourth consecutive quarter at or above this level. The mix shift toward higher-value data center and power solutions is overcoming the drag from declining consumer electronics exposure.

The segment performance tells a more nuanced story. Flex Agility Solutions (FAS), which includes the data center business, delivered $3.8 billion in revenue (+4% YoY) with segment margin of 6.0%. For the six-month period, FAS revenue grew 7% with segment margin expanding 60 basis points to 6.3%. This improvement was driven by a high-teen percentage increase in the Communications, Enterprise and Cloud (CEC) business, offset by a significant decrease in Consumer Devices. Flex is sacrificing low-margin consumer revenue to capture higher-margin AI infrastructure business, a trade-off that enhances long-term earnings power.

Flex Reliability Solutions (FRS) posted $3.0 billion in revenue (+3% YoY) with segment margin expanding an impressive 105 basis points to 6.5%. The six-month margin improved 100 basis points to 6.2%, driven by favorable mix impacts from Power and strong execution. FRS includes the Industrial business, where power products generated approximately $1.3 billion in fiscal 2025 revenue. The power business is growing faster than the segment average, particularly in data center applications, creating a margin tailwind that should persist as AI infrastructure build-out accelerates.

The data center business deserves special attention. Total data center revenue grew approximately 50% year-over-year in fiscal 2025 to about $4.8 billion, with cloud programs contributing $3.5 billion and power products adding $1.3 billion. Management expects data center revenue to reach approximately $6.5 billion in fiscal 2026, growing at least 35% year-over-year and representing 25% of total revenue. This growth is occurring at margins well above the corporate average, pulling overall profitability higher. The company's ability to sustain this growth at scale validates its value proposition and execution capability.

Free cash flow generation remains robust, with conversion above 80% and Q2 FY26 free cash flow of $305 million. Net capital expenditures of $148 million (approximately 2% of revenue) demonstrate disciplined investment in growth. The company repurchased $297 million of stock in Q2, reflecting management's confidence in the valuation. Flex is generating sufficient cash to fund organic growth, make strategic acquisitions, and return capital to shareholders simultaneously—a hallmark of a mature, well-managed industrial company.

Outlook, Management Guidance, and Execution Risk

Flex's updated fiscal 2026 guidance signals management's confidence in the strategic pivot despite external headwinds. Revenue guidance of $26.7 to $27.3 billion represents a $500 million improvement from the prior midpoint, while adjusted operating margin guidance of 6.2% to 6.3% demonstrates consistency above the 6% threshold. Adjusted EPS guidance of $3.09 to $3.17 per share, increasing the midpoint by $0.17, implies 23% year-over-year growth at the midpoint. The guidance incorporates the impact of the Ukraine facility shutdown and tariff headwinds while still showing acceleration.

The segment outlook reinforces the thesis. Agility Solutions revenue is expected to grow mid- to high single digits, driven by continued strength in cloud offset by weakening consumer devices and the temporary Ukraine loss. Reliability Solutions revenue is expected to grow low to mid-single digits, driven by strong demand in data center power and medical devices offset by soft but stabilizing renewables and auto. This balanced growth profile demonstrates Flex's ability to navigate cyclical headwinds in some end markets while capturing structural tailwinds in others.

Management's commentary on the data center business is particularly bullish. CEO Revathi Advaithi stated, "We remain bullish in our outlook and continue to expect our data center revenue to grow at least 35% this year," adding that "it was only a year ago where you guys were pressing me on a 6% sustainable margin... we're a year ahead of the long-term guide." The company is exceeding its own transformation timeline, with margin expansion occurring faster than originally planned. The CFO's comment that power will grow slightly above the data center average in the latter half of fiscal 2026 indicates accelerating momentum in the highest-margin portion of the business.

The guidance assumptions reveal management's view of the competitive landscape. The company expects tariffs to remain largely a pass-through cost with strong contractual protections, though acknowledging potential impacts on cash flow timing. Flex has pricing power and customer relationships strong enough to absorb cost increases without margin erosion—a significant advantage over smaller competitors. The increasing shift to customer-sourced inventory models, which mutes reported revenue growth but drives operating profit, demonstrates Flex's ability to adapt its business model to customer needs while maintaining profitability.

Risks and Asymmetries: What Could Break the Thesis

The Ukraine missile strike on the Mukachevo facility represents a tangible execution risk. The $41 million in asset impairments and other charges, while manageable for a company of Flex's scale, created a revenue headwind of slightly north of $100 million in the second half of fiscal 2026. The fragility of global supply chains and the potential for geopolitical events to disrupt operations are evident here. However, the company's response—safely evacuating all team members and implementing contingency manufacturing plans—shows operational resilience. The fact that Flex could raise full-year guidance despite this disruption suggests the underlying business momentum is strong enough to absorb such shocks.

Customer concentration remains a material risk, with the top customers representing approximately 30% of revenue. This creates dependency on a handful of technology companies' capital expenditure plans. While the AI infrastructure build-out appears durable, any slowdown in hyperscaler spending or shift to in-house manufacturing could disproportionately impact Flex. The company's diversification across end markets and geographies mitigates but does not eliminate this risk.

Competitive pressure from Jabil and Celestica in the AI infrastructure space represents a strategic threat. Jabil's Intelligent Infrastructure segment grew 62% year-over-year in Q4 FY2025, while Celestica's CCS segment margins reached 8.3%. These competitors are also targeting the high-margin data center opportunity with significant resources and capabilities. Flex's "grid to chip" differentiation provides a moat, but sustained investment and innovation will be required to maintain competitive advantage as the market matures.

Tariff and trade policy uncertainty creates ongoing risk. While Flex has successfully passed through tariff costs to date, the CFO acknowledges the situation remains fluid. Prolonged trade tensions could impact end customer demand or create margin pressure if pass-through mechanisms break down. The company's regionalized footprint provides some insulation, but not immunity, from trade disruptions.

Valuation Context: Pricing a Transformation

At $61.19 per share, Flex trades at 26.96 times trailing earnings and 19.21 times price-to-free-cash-flow, with an enterprise value to EBITDA ratio of 12.90. These multiples sit below direct EMS peers despite Flex's superior margin expansion trajectory. Jabil trades at 36.88 times earnings with operating margins of 5.84% (versus Flex's 5.10% TTM but 6.0% adjusted), while Celestica commands 52.57 times earnings with 10.32% operating margins but faces greater customer concentration risk.

The valuation disconnect becomes more apparent when considering cash flow metrics. Flex's 80%+ free cash flow conversion rate and $1.07 billion in annual free cash flow generation provide substantial capital allocation flexibility. The company's net debt to equity ratio of 0.85 compares favorably to Jabil's 2.46, indicating a more conservative balance sheet that can support growth investments without financial strain. The market has not fully recognized Flex's transformation from a cyclical EMS provider to a structurally higher-margin technology infrastructure company.

Relative to historical valuation ranges, Flex's price-to-sales ratio of 0.87 sits near the lower end for the sector, particularly given the company's improved margin profile. The enterprise value to revenue ratio of 0.95 reflects a business still valued primarily on its manufacturing scale rather than its technology differentiation. As data center revenue grows to 25% of the total and margins continue expanding, the market may re-rate Flex toward technology multiples rather than manufacturing multiples.

The company's capital allocation priorities—maintaining an investment-grade balance sheet, funding organic growth, pursuing accretive M&A, and returning capital through share repurchases—support the valuation case. The $297 million in Q2 share repurchases, combined with the $544 million in six-month buybacks, signals management's belief that the stock remains undervalued. This provides downside support and demonstrates alignment with shareholder interests.

Conclusion: A Manufacturing Company Reimagined as AI Infrastructure

Flex Ltd. stands at an inflection point where its strategic transformation from traditional EMS provider to AI infrastructure architect is translating into measurable financial results. The company's ability to grow data center revenue 50% annually while expanding operating margins above 6% demonstrates that the "EMS + Products + Services" strategy is more than a rebranding—it is a fundamental re-engineering of the business model toward higher-value, more defensible markets.

The central thesis hinges on two critical variables: the durability of AI infrastructure demand and Flex's ability to maintain its unique "grid to chip" positioning against aggressive competition from Jabil and Celestica. The company's regionalized manufacturing footprint provides a structural advantage in an era of supply chain reshoring and trade tensions, while its integrated power and cooling solutions create switching costs that pure-play competitors cannot easily replicate.

For investors, the key monitoring points will be data center revenue growth rates versus the 35% guidance, competitive win rates in next-generation AI platforms, and margin progression as the product mix continues shifting toward higher-value solutions. The Ukraine disruption and tariff headwinds have already tested operational resilience, and the company's ability to raise guidance despite these challenges suggests underlying business momentum is robust.

The valuation at 19.2x free cash flow appears conservative for a company capturing a disproportionate share of the AI infrastructure build-out. As data center revenue approaches 25% of the total and margins stabilize above 6%, the market may recognize that Flex has evolved beyond traditional EMS economics. The story is not without risks—customer concentration, geopolitical disruptions, and competitive pressure could all derail the transformation—but the combination of strategic positioning, operational execution, and financial discipline creates a compelling risk-reward profile for investors willing to look beyond the company's manufacturing heritage to see the technology infrastructure company emerging within.