From "returning to 200 yuan" to "whether it will form a head," Hon Hai tests key prices, and AI risks emerge! How to view the future of Hon Hai and Hon Hai Precision?

Wen / WanGu HuaAn

Hon Hai's stock price tests key support, AI server profits fall short of expectations, and with tariffs and geopolitical risks interfering, investors should focus on profit quality and long-term competitiveness.

Hon Hai's stock price reached a high of NT$234.5 last year, but as the market began to question the growth momentum of AI servers, Hon Hai (2317) has seen its stock price continue to decline recently. On March 27 this year, it fell again to NT$160, testing last year's (2024/8/6) significant low of NT$160, with technical indicators becoming precarious. The market's investment outlook on Hon Hai is also gradually changing, shifting from "Can it return to NT$200?" to "Is the stock price about to peak?" (Original text published on March 27)

In addition to Hon Hai, its subsidiary, Hon Hai Precision Industry Co., Ltd. (2354), has also been a disaster area for retail investors recently. The company benefited last year from the dual positives of the Switch 2 stockpiling topic and entering the NVIDIA supply chain, driving significant revenue growth. In the fourth quarter of 2024, revenue grew by 175% compared to the same period in 2023, and the stock price once approached the NT$100 mark, reaching a high of NT$99.9.

However, after the fourth quarter 2024 financial report was released, Hon Hai's gross margin was only 4.02% and operating margin was only 1.74%, compared to a gross margin of 12.2% and operating margin of 2.6% in the fourth quarter of 2023, showing a significant decline. Market confidence was severely impacted, causing the stock price to drop from the high of NT$99.9 to NT$67.1 today (March 27).

Will Hon Hai be able to hold the NT$160 level? Is it a good buy if Hon Hai Precision falls back to the previous consolidation range? What factors should investors consider?

1. Will Hon Hai's establishment of factories in the U.S. improve its fundamentals, or will it become a burden?

In recent years, Hon Hai has continued to expand its manufacturing layout in the United States, from Wisconsin to the latest investment project in Texas, in response to the U.S. policy environment and key customers (such as Apple and NVIDIA) demanding local supply. Hon Hai's chairman, Liu Yangwei, stated last year that the company has adjusted its local layout based on market demand over the past few years, and since re-signing the investment agreement in 2021, the group's total investment in the area has reached USD 1 billion. So far, the number of employees has grown by 40%, and revenue at the Wisconsin plant has increased by 140% year-on-year.

Hon Hai is attempting to reposition the strategic value of its U.S. base, and the latest investment involves its subsidiary Ingrasys Technology USA Inc., which has purchased 86.34 acres of land and over 1 million square feet of factory space in Houston, Texas, for a total amount of USD 14.2 million (approximately NT$4.7 billion), aimed at expanding the AI server production line and serving U.S. customers.

Although these investment projects enjoy a certain degree of tax reductions, land incentives, and infrastructure subsidies locally, investors should still cautiously consider the actual help these subsidies provide to overall profitability. The overall cost structure of U.S. manufacturing is relatively high, with high labor costs, high taxes, and long-term operating costs being unavoidable. Subsidies are often only temporary incentives and cannot offset the pressure in the long term More importantly, Hon Hai's current financial structure is still characterized as "low-margin," with a gross margin of only 6.25% and an operating margin of 2.92% in 2024. Even if revenue grows, if it cannot effectively raise gross margins and profitability, these investments may ultimately only increase revenue scale, but contribute little to EPS and shareholder returns, and may even become a source of financial leverage pressure.

In the long run, investing in the U.S. to build trust will become Hon Hai's true return

Although the short-term financial benefits of Hon Hai's investment in U.S. factories remain uncertain, investors should view the strategic implications of this layout from a higher level. Given Hon Hai's current capital structure and cash flow situation, investing in the U.S. does not pose a financial burden on overall operations. This type of expansion is considered a "manageable" strategic expenditure. More importantly, the nature of this geopolitical investment is not just for short-term gross profits or capacity allocation, but to "buy trust" for future cooperative relationships. In the face of the U.S. government's emphasis on localizing supply chains, as well as the heightened sensitivity of core customers like Apple and NVIDIA to manufacturing safety and political stability, Hon Hai's willingness to take the lead and bear costs undoubtedly strengthens its irreplaceability in the supply chain.

From this perspective, although establishing factories in the U.S. may temporarily increase costs, it may help stabilize orders and enhance negotiating power in the medium to long term, which still has positive significance for Hon Hai's overall competitiveness and global positioning.

2. Is geopolitical risk further escalating?

Recently, cross-strait relations have continued to be tense, and the Taiwan Strait issue has once again heated up. The question of which side companies choose will gradually emerge, coupled with the continuation of the Trump administration's hardline stance towards China, there is a possibility of renewed escalation in the U.S.-China technology and trade war. As a core supplier in the supply chain, Hon Hai and its subsidiary, Hongzhun, will inevitably be at the forefront. Even though Hon Hai has a global presence, geopolitical risks cannot be ignored.

3. Are gross margins and operating margins bottoming out and rebounding, or are they still in a downward revision cycle?

Record revenue does not equal fundamental improvement; investors need to focus on the right indicators.

From Honzhun's Q4 2024 financial report, both gross margin and operating margin have shown significant declines, indicating that even with record revenue, it has not effectively translated into substantial profits. If the profit indicators in the coming quarters cannot stabilize and rebound, or continue to deteriorate, it will not only weaken market confidence in the fundamentals but may also cause technical support levels to be breached, leading to a comprehensive reassessment of price-to-earnings ratios and valuations.

Tariffs + Geopolitical Risks + Concerns about AI Server Demand: A Triple Blow

For Hon Hai, in addition to facing the dual blows of trade wars and geopolitical risks, investors should also be aware that the potential for gross margin improvement from AI servers may be limited. After many manufacturers joined the AI server supply chain last year, market competition has become increasingly fierce, and there may be pressure for price competition in the future.

Although the market generally still believes that demand for AI chips and servers remains strong, especially driven by the financial reports of major companies like NVIDIA, short-term order momentum remains considerable, recent stock performance of related companies has generally been weak, reflecting market concerns about whether AI investments are overheated and whether capacity is ahead of demand. Some institutional investors and industry executives have also warned that the AI industry may face bubble risks, especially in the context of rapid capital investment and incomplete realization of commercial applications AI themes indeed have long-term development potential, but in the OEM model, scale growth does not necessarily translate into profit improvement. The current market enthusiasm for AI server OEMs can easily lead to overlooking the most important aspects of the fundamentals—the real changes in gross profit and operating profit margins. Investors should not only focus on headlines like "record revenue" and "explosive order growth," but should pay close attention to the signals revealed by financial report numbers. Otherwise, after revenue rises and stock prices react enthusiastically, if profitability does not improve in a timely manner, the subsequent correction period may come faster than expected.

Such risks have gradually emerged in Hon Hai Precision Industry Co., Ltd., while in contrast, Hon Hai still holds relative advantages in revenue scale, customer structure, and capital stability. In 2024, it has reported earnings per share of NT$11.01, and the market remains cautiously optimistic about its profitability performance this year. Although the growth rates of gross profit margin and operating profit margin may not meet expectations, the overall profitability trend is still moving in a positive direction.

Based on the current price-to-earnings ratio levels given by the market, the stock price has a certain degree of support in the current range. Although the NT$160 level may be difficult to hold, and further short-term corrections may occur, as long as the fundamentals do not change, Hon Hai can still be regarded as one of the long-term high-performing stocks worth tracking throughout the year.

This article is for reference only and does not constitute any buy or sell recommendations. Investors should assess carefully and bear the risks themselves