Flex's Margins Flex Upward: A Data Center Play with Risks

Flex Ltd (FLEX) just delivered a set of results that should make investors sit up and take notice—even if the stock price stumbled a bit on the news. Let’s dive into why this electronics manufacturing giant is worth your attention, and why its future hinges on one key sector: data centers.
The Numbers: Margins Are Flexing Upward
Flex’s Q4 FY2025 results were a mixed bag but leaned heavily into one critical trend: margin expansion. Revenue hit $6.4 billion, a 4% year-over-year rise and above estimates. But the real star was the bottom line: adjusted EPS surged 23% to $2.65, thanks to gross margins hitting 8.8% and operating margins reaching a record 6.2% in Q4. Full-year free cash flow hit a record $1.1 billion, a sign of operational discipline.

Why Data Centers Are the Game-Changer
Flex’s growth engine is its data center segment, which exploded 50% year-over-year in both Q4 and the full year. This division now contributes $4.8 billion annually, driven by two key areas:
1. Cloud Solutions: Hyperscale data centers and liquid cooling tech (acquired via JetCool) are in high demand as AI and big data fuel server upgrades.
2. Power Solutions: Grid-to-chip power management (bolstered by the Crown Technical acquisition) is critical for next-gen data centers, and Flex is the only firm integrating compute and power systems.
The data center boom isn’t slowing down: Flex expects this segment to grow ~30% in FY2026, with power solutions outperforming cloud due to North American capacity expansion.
The Risks: Tariffs, Autos, and Market Volatility
Investors sent Flex’s shares down 3.1% pre-market, and there’s good reason for caution:
- Tariffs: While 90% of Mexico-made goods avoid U.S.-China tariffs, raw material costs and geopolitical risks linger.
- Auto Sector Slump: Weak automotive demand dragged down full-year revenue, and Flex’s long-term bets on EVs and ADAS systems aren’t yet paying off.
- Customer-Sourced Inventory (CSI) Models: These now account for 17% of revenue (up from 11% in 2024) and mute top-line growth while boosting margins.
The Outlook: High Margins, But How High?
Flex is now targeting a 6%+ operating margin for FY2026—a full year ahead of its previous 2027 goal. Guidance calls for $25–$26.8 billion in revenue and EPS of $2.81–$3.01. CEO Revathi Advaithi is bullish: “We’re the only company integrating compute and power solutions… this is a $50 billion market by 2030.”
Analysts are split but many see value: price targets range from $35 to $52, with a P/E of 14.6 suggesting Flex is trading below its growth potential.
Conclusion: Buy the Dip—But Keep an Eye on Data Centers
Flex is a stock to watch for those willing to bet on cloud infrastructure and the AI revolution. The margin gains and data center dominance are real, and Flex’s $1.1 billion free cash flow machine is a sturdy foundation.
However, the risks are significant. If data center growth slows—or if the auto sector’s struggles worsen—the stock could falter. Investors should also monitor macroeconomic factors like interest rates, which could crimp corporate spending on tech infrastructure.
At current levels, Flex looks like a Hold with Upside Potential. For aggressive investors, the 3.1% post-earnings dip might be a buying opportunity—but only if you’re all-in on the data center boom.
Final Take:
- Strengths: Margin expansion, data center dominance, $1.1B free cash flow.
- Weaknesses: Tariffs, auto sector drag, reliance on tech spending.
- Verdict: Flex is a play on the future of cloud computing—but don’t ignore the risks.
Stay tuned!
Comments
No comments yet