Methode Electronics: Riding the Data Center Wave Amid Automotive Headwinds

Methode Electronics (NYSE: MTD) is undergoing a high-stakes transformation, shifting its focus from automotive manufacturing to the booming data center infrastructure sector. This strategic pivot, announced in 2023, has become a lifeline as the company seeks to offset declining sales in its EV programs and capitalize on the global shift to cloud computing and artificial intelligence. While recent financial results hint at progress, Methode's success hinges on balancing near-term risks—including supply chain volatility, EV sector headwinds, and competitive pressures—with its long-term bet on hyperscale data centers.

The Data Center Opportunity: Growth Amid Transition

The Industrial segment, now Methode's growth engine, reported record sales of $132.6 million in Q4 2025, a 13.1% year-over-year increase. This segment's operational income rose to $26.2 million (19.8% of sales), marking a significant margin expansion compared to 17.1% in the prior year. The company's high-density power distribution units (PDUs) and cooling systems are critical components for hyperscale data centers operated by tech giants like Amazon, Google, and Microsoft.

The data center market's compound annual growth rate (CAGR) of 12–15% through 2030 (per IDC estimates) positions Methode to benefit from rising demand for AI, 5G, and edge computing. CEO Jon DeGaynor emphasized this in recent remarks, calling the pivot a “strategic reallocation of capital to higher-margin opportunities.”

Financials: A Fragile Path to EBITDA Growth

Despite Industrial segment momentum, Methode's broader financial picture remains uneven. Full-year 2025 sales dropped to $1.05 billion, down from $1.11 billion in 2024, due to a 22.6% year-over-year decline in automotive sales. EV-related revenue now accounts for just 20% of net sales, down from 24% in Q3 2025. This reflects softer demand from clients like Stellantis, which contributed to inventory write-downs and a net loss of $62.6 million for the year.

The company's adjusted EBITDA of $42.5 million in 2025, however, sets a baseline for its 2026 target of $70–$80 million—a doubling of profitability. This goal depends on executing 53 new data center programs over two years (33 still pending) while reducing EV sales by an expected $100 million in 2026.

Near-Term Risks: A Rocky Road Ahead

1. EV Sector Volatility: Methode's automotive business, once a growth pillar, now faces prolonged headwinds. A prolonged downturn in EV demand—or further inventory overhangs—could delay progress toward EBITDA targets.
2. Execution Risks: Competitors like Amphenol and TE Connectivity are aggressively expanding their data center portfolios. Methode's ability to secure contracts for hyperscale projects will determine its margin sustainability.
3. Geopolitical Uncertainties: Trade tariffs and supply chain disruptions remain a threat. While Methode plans to mitigate tariffs by reshoring production, geopolitical tensions could still disrupt timelines.

Investor Considerations: A High-Reward, High-Risk Bet

• Buy Signal: Investors should consider Methode if data center sales surpass $100 million annually and EBITDA reaches the $80 million target by 2026. The stock's forward P/E of ~12x (assuming $1.20 EPS) suggests upside potential if growth materializes.
• Hold/Reduce Signal: Caution is warranted if EV-related losses persist beyond . Continued margin pressure or execution delays in data center programs could erode confidence.
• Sell Signal: A 2026 EBITDA below $60 million or a sales drop below $900 million would signal strategic missteps.

Conclusion: A Turnaround Worth Watching

Methode's pivot to data centers is a calculated gamble. The company's $26.3 million in free cash flow in Q4 2025 and reduced net debt ($214 million) provide a financial cushion, but execution must improve. The CEO's emphasis on cost discipline—including a dividend cut to $0.07/share and a streamlined board—shows a willingness to prioritize growth over short-term payouts.

For investors, Methode represents a high-beta play on the data center megatrend. While risks are substantial, the potential rewards—driven by hyperscale infrastructure demand—make it a stock to monitor closely. The next 12–18 months will be critical: If Methode can deliver on its program launches and offset EV declines, it could emerge as a key player in a $200 billion market. The path is narrow, but the destination is compelling.