NVIDIA and Apple's "double blessing" upgrade cycle, Hon Hai Precision Industry Co., Ltd. is expected to usher in a period of explosive performance?

Author: Xu Chao

Morgan Stanley is bullish on the leading contract manufacturer Hon Hai Precision Industry Co., Ltd. (Foxconn's parent company), citing benefits from the growth in AI server demand and iPhone upgrade cycle, with the company's performance expected to significantly increase.

Morgan Stanley stated that Hon Hai Precision has become a key beneficiary of the rising demand for AI servers. Its exclusive supplier status in NVIDIA GPU modules will enable the company to achieve strong revenue and profit in the cloud field.

Considering that the iPhone accounts for the vast majority of Hon Hai's consumer business, the potential iPhone upgrade cycle will be another cyclical growth driver for Hon Hai in 2025.

Key Beneficiary of Rising AI Server Demand

The growth in AI server demand is one of the key drivers for the performance improvement of Hon Hai Precision.

Morgan Stanley believes that Hon Hai Precision has become a key beneficiary of the rising demand for AI servers. Its exclusive supplier status in NVIDIA GPU modules, increased market share in substrates, and expanded market share in rack-level assembly will enable the company to achieve strong revenue and profit in the cloud field.

The rapid growth of NVIDIA's GB200 is at the core of all growth.

Morgan Stanley believes that benefiting from significant performance improvements in inference and training tasks, as well as NVIDIA's active promotion of rack-level systems based on GB200 (multiple GPUs interconnected via NVLink 5.0). GB200 is expected to account for 50% of NVIDIA's total GPU product portfolio in 2025, higher than the previous expectation of 35%.

GB200 has shown significant performance improvements in inference and training tasks, increasing its attractiveness in the AI server market. With the increasing proportion of GB200 in NVIDIA's GPU product portfolio, it is estimated that the shipment volume of GB200 in 2025 may reach 35-40k.

In terms of contract manufacturing market share, Morgan Stanley expects Hon Hai Precision to become the sole supplier of NVIDIA GB200 server racks (DGX configuration), and to gain a higher share in MGX-configured GB200 racks for major U.S. cloud service providers (CSPs) and enterprise customers. The company is expected to dominate the market share in GB200 modules (including Superchip boards and NVLink Switch boards), reaching approximately 80% by 2025 This will drive Hon Hai Precision Industry Co., Ltd.'s AI server business revenue to grow significantly. By 2025, AI server revenue is expected to account for 27% of Hon Hai's total revenue and gross profit, mainly driven by the increased hybrid ratio of GB200 in the NVIDIA Blackwell GPU architecture and the dominant market share in GB200 modules (Superchip board, Switch board).

Hon Hai Precision Industry Co., Ltd. also has the opportunity for vertical integration in the AI server field. The company has the potential to expand its business into more components and subsystems of AI servers, such as liquid cooling systems, cables/connectors, chassis/casings, etc.

JP Morgan believes that by vertically integrating into these areas, Hon Hai Precision Industry Co., Ltd. can improve the gross margin of AI servers. Currently, under the MGX model of GB200, the gross margin of rack-level assembly is only about 5%.

iPhone Upgrade Cycle Brings Periodic Growth

In the consumer electronics sector, Apple's potential upgrade cycle gives Hon Hai Precision Industry Co., Ltd. the opportunity to achieve better year-on-year revenue growth in the second half of 2024.

Currently, the market is very optimistic about the sales of the iPhone 16 series. According to industry sources, Apple's iPhone 16 series stocking target guidance has been raised. After the adjustment, the stocking target for the iPhone 16 series this year is around 90 million units, which will drive Hon Hai Precision Industry Co., Ltd.'s revenue growth in the second half of the year.

However, JP Morgan stated that considering Apple's integration of more AI functions in its devices and the launch of more AI applications, the iPhone is expected to see a larger upgrade cycle in 2025/2026. Supply chain information indicates that the iPhone 17 is expected to integrate liquid cooling (Vapor Chamber) and increase the DRAM scale to accommodate more powerful AI functions in the iPhone. Users may be encouraged to upgrade to the new iPhone with these advanced features.

Given that the iPhone accounts for the vast majority of Hon Hai's consumer business (consumer business accounts for 45-50% of revenue in the 2024 fiscal year), the potential upgrade cycle of the iPhone will be another periodic growth driver for Hon Hai in 2025.

In terms of contract manufacturing competitors, despite the presence of new entrants such as Tata Group and Wistron, Hon Hai Precision Industry Co., Ltd. is expected to maintain its high share in the iPhone EMS market as the company holds a high share in the Pro models and is a key supplier for overseas production (especially in India)