AI server ramp-up lifts Compal's growth outlook, but cost pressures and fair valuation support maintaining Neutral

Overview

The report assesses Compal's 2Q26 results, July operating performance, and AI server capacity expansion outlook. Goldman Sachs believes the server business ramp-up and improved operating efficiency support higher revenue and earnings forecasts, but consumer electronics demand remains constrained by component costs and the valuation is already relatively fair, so it maintains a Neutral rating.

Core views

July operating performance was better than Goldman Sachs had feared. Compal's July revenue reached NT$81bn, up 38% YoY and down 15% MoM, 10% above Goldman Sachs' forecast, mainly reflecting the ramp-up in AI server shipments. PC shipments during the same period were 1.8m units, down 22% YoY and 25% MoM, which the report attributes to demand being pulled forward into 1H26 amid rising memory costs. Goldman Sachs expects revenue to grow consecutively from August through December, driven by increased AI server shipments, related capacity expansion, and an upgraded PC product mix toward premium models such as AI PCs; 3Q26E and 4Q26E revenue are expected to grow 6% and 10% QoQ, respectively, with end demand for AI servers from Neocloud customers providing important support. 2Q26 revenue was NT$238bn, up 32% YoY and 18% QoQ, 10% and 8% above Goldman Sachs' forecast and Bloomberg consensus, respectively, mainly driven by strong AI server growth and the pull-forward of PC consumption. Gross margin was below Goldman Sachs' and market expectations due to a higher revenue mix from AI servers and increased raw material costs; however, gross profit rose 4% QoQ and was only 2% and 4% below Goldman Sachs' and consensus expectations, respectively, remaining broadly in line. The operating expense ratio was 3.4%, better than both forecasts, reflecting improved operating efficiency; combined with higher-than-expected non-operating income, net profit reached NT$3bn, up 549% YoY and 59% QoQ, 53% and 40% above Goldman Sachs' forecast and Bloomberg consensus, respectively. In light of July revenue and the 2Q26 results, Goldman Sachs raised its 2026—2028E revenue forecasts by 6%, 8%, and 10%, respectively, citing higher AI server business revenue, while customer base expansion, global capacity expansion, and migration toward system-level manufacturing should provide continued support. It also raised its net profit forecasts for the same period by 6%, 7%, and 11%, respectively, driven by both the revenue forecast revisions and lower operating expense ratios as scale increases. On the other hand, as lower-margin AI servers account for a larger share of the business, Goldman Sachs lowered its 2026—2028E gross margin forecasts; this means revenue growth will not translate proportionally into gross margin improvement, although operating leverage and expense control can still support net profit. The report remains positive on business diversification, particularly Compal's enhanced global delivery capabilities resulting from capacity expansion in the United States, Taiwan, China, and Vietnam. However, consumer electronics still account for the majority of the company's revenue, and rising costs for raw materials such as memory and CPUs could suppress end demand. This structure means the growth improvement from AI servers coexists with cost and demand pressures in the traditional consumer electronics business, which is also the main reason Goldman Sachs has not adopted a more positive rating. On valuation, Goldman Sachs continues to determine its 12-month target price using a near-term P/E methodology. The 2027E target P/E was lowered from 13.6x to 13.1x, based on the updated correlation between forward P/E multiples and EPS growth for PC and server peers; sector de-rating caused by rising component costs was the main reason for the lower target multiple. Combined with the higher earnings forecasts, the 12-month target price was nevertheless raised from NT$39.5 to NT$41.3, implying 3.9% upside relative to the reference price of NT$39.75. The 13.1x target P/E is approximately equal to Compal's historical average forward P/E; Goldman Sachs considers EPS growth and market re-rating of ODM companies to be the main variables affecting share price performance, but views the current valuation as fair and therefore maintains its Neutral rating. The key two-sided risks identified in the report are the strength of the PC market recovery, the pace of the AI server ramp-up, and whether tablet demand is above or below expectations.

Analysis framework

Goldman Sachs first uses July revenue, PC shipments, and 2Q26 financial data to assess business momentum, comparing actual results with its own forecasts and Bloomberg consensus; it then updates its 2026—2028 revenue, gross margin, operating expense ratio, and net profit forecasts based on AI server shipments, customer expansion, global capacity, and product mix changes; finally, it determines the 2027E target multiple using the correlation between peer EPS growth and forward P/E and calculates the 12-month target price accordingly.

Methodology notes

• Valuation methodologyPE/PEG valuation

  12-month target price based on 2027E P/E

  The report derives a 13.1x target P/E based on the relationship between EPS growth and forward P/E for PC and server peers, then combines it with the updated earnings forecast to arrive at a target price of NT$41.3.

• Industry/sector analysis frameworkVolume-price decomposition

  Shipment volume and product mix driver analysis

  The report explains revenue trends by combining changes in PC shipments, the ramp-up in AI server shipments, and upgrades to the premium PC product mix, while distinguishing revenue growth from changes in gross margin.

• Corporate fundamentals and financial frameworkOperating/financial leverage analysis

  Scale expansion and operating expense ratio improvement

  The report believes expanding revenue scale and improving operating efficiency will lower the operating expense ratio, allowing net profit to benefit even if a higher AI server mix depresses gross margin.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Compal (2324.TW)

  The AI server shipment ramp-up, global capacity expansion, and migration toward system-level manufacturing support higher revenue and net profit forecasts.

  Strengths

  Expanding AI server customer base; capacity expansion in the United States, Taiwan, China, and Vietnam; improved operating efficiency and expense control; greater business diversification.

  Weaknesses

  Consumer electronics still account for the majority of revenue; a higher AI server mix depresses gross margin; rising memory and CPU costs may restrain end demand.

  Comparison

  The target P/E is determined based on the correlation between EPS growth and forward P/E for PC and server peers, with 13.1x approximately in line with the company's historical average forward P/E.

  Risks

  The PC market recovery, AI server ramp-up, and tablet demand could each be stronger or weaker than expected.

Key data

• July revenueNT$81bnUp 38% YoY and down 15% MoM, 10% above Goldman Sachs' forecast.
• July PC shipments1.8m unitsDown 22% YoY and 25% MoM.
• 3Q26E/4Q26E revenue growth+6%/+10% QoQExpected to be driven by AI server end demand, capacity expansion, and product mix upgrades.
• 2Q26 revenueNT$238bnUp 32% YoY and 18% QoQ, 10% and 8% above Goldman Sachs' forecast and Bloomberg consensus, respectively.
• 2Q26 gross profit+4% QoQ2% and 4% below Goldman Sachs' forecast and Bloomberg consensus, respectively, but broadly in line.
• 2Q26 operating expense ratio3.4%Better than Goldman Sachs' forecast and Bloomberg consensus.
• 2Q26 net profitNT$3bnUp 549% YoY and 59% QoQ, 53% and 40% above Goldman Sachs' forecast and Bloomberg consensus, respectively.
• 2026—2028E revenue forecast revisions+6%/+8%/+10%Mainly reflecting AI server revenue, customer expansion, global capacity expansion, and migration toward system-level manufacturing.
• 2026—2028E net profit forecast revisions+6%/+7%/+11%Mainly driven by higher revenue forecasts and lower operating expense ratios.
• 2027E target P/E13.1xPreviously 13.6x, approximately in line with the company's historical average forward P/E.
• 12-month target priceNT$41.3Previously NT$39.5.
• Reference share price and upsideNT$39.75 / 3.9%The basis for calculating the report's target price upside.

Impact & implications

Goldman Sachs believes AI server shipments, customer base expansion, and global capacity expansion will increase Compal's future revenue, while scale effects and expense control should support earnings growth; however, a higher AI server business mix will dilute gross margin, and rising memory and CPU costs could suppress consumer electronics demand, which accounts for the majority of revenue. The earnings forecast upgrades are sufficient to raise the target price but insufficient to offset the lower target valuation multiple and pressures in the traditional business, so the rating remains Neutral.

Risks

• The PC market recovery could be stronger or weaker than expected.
• The AI server business could ramp up faster or slower than expected.
• Tablet demand could be higher or lower than expected.

What to watch

• Monitor whether revenue grows consecutively from August through December as expected and whether 3Q26E and 4Q26E revenue achieve QoQ growth of 6% and 10%, respectively.
• Monitor the pace of AI server shipments, customer expansion, and global capacity expansion.
• Monitor the PC market recovery, tablet demand, and changes in memory and CPU costs.
• Monitor EPS growth and the market re-rating of the ODM sector, as the report views them as the main factors affecting share price performance.