Gross margin beat expectations; new server product ramp-up expected to drive Fositek back to growth in the second half

Overview

Fositek announced 2Q26 results and held an investor meeting. As both the AI server QD and smartphone hinge businesses were in product transition periods, quarterly revenue declined 11% QoQ, and EPS was NT$12.39, below J.P. Morgan and market expectations; however, server QD technology upgrades and yield improvements drove gross margin up to 34%, with performance clearly better than on the revenue side. The report believes VR200 mass production will not be delayed further, and together with Huawei’s new foldable smartphones and the ramp-up of ASIC QD projects, the company’s revenue will resume growth from 3Q26 and further accelerate in 4Q26.

Core views

The core logic is that the short-term revenue weakness caused by product transitions is nearing an end. 3Q26 growth will mainly come from Nvidia VR200 compute tray and switch tray QD shipments, as well as initial pull-in orders for Huawei’s inward-folding and tri-fold new products; 4Q26 will further add AWS Trainium 3 and Google TPU v8 liquid-cooling QD projects. The server business mix is expected to rise to 60% by the end of 2026, and a more favorable product mix, technology upgrades, and yield improvements are expected to drive gross margins to 35% and 36% in 3Q26 and 4Q26, respectively. Although weakness in the smartphone hinge business led to earnings forecast cuts, the re-acceleration of revenue and upward revision trend in gross margin are expected to gradually repair market sentiment.

Analysis framework

The report combines quarterly results versus market expectations, customer project shipment schedules, changes in business mix, and yield trends to forecast earnings, and uses a forward P/E approach within historical trading valuation ranges to determine the target price. It also compares new and old forecasts and Bloomberg consensus expectations to assess the trade-off between short-term earnings downgrades and medium- to long-term server growth potential.

Methodology notes

• Earnings forecastSegment and quarterly driver-based forecasting

  Forecast revenue, margins, and EPS based on the shipment schedules of server QD and smartphone hinge projects.

  The 3Q26 forecast incorporates VR200 QD and pull-in orders for Huawei’s new foldable products, while 4Q26 further includes the ramp-up of AWS Trainium 3 and Google TPU v8 liquid-cooling QD, and raises the gross margin path based on a higher server business mix, technology upgrades, and yield improvements.

• Relative valuationForward P/E valuation

  Calculate the target price by multiplying forward forecast EPS by a target P/E multiple.

  The June 2027 target price of NT$2,600 uses 22x expected P/E for 2H27 to 1H28, a valuation multiple broadly in line with the company’s historical average since its emerging stock market listing in 2020.

• Performance assessmentExpectation gap analysis

  Compare actual results, analyst forecasts, and market consensus expectations to identify beats or misses in revenue, margins, and EPS.

  2Q26 revenue and EPS were below expectations, but the 34% gross margin was above Bloomberg consensus expectations of 33%, showing that technology and yield improvements in the server QD business offset part of the revenue pressure.

Asset mapping & comparison

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

• Fositek (6805.TW)

  Core subject of the report, rated Overweight.

  Strengths

  Increasing number of server QD customers and projects, with technology and yield improvements driving gross margin expansion and strong earnings growth potential over the next several years.

  Weaknesses

  Weak smartphone hinge business, with recent product transitions and order delays causing revenue and EPS to miss expectations.

  Comparison

  The current share price has lagged TAIEX by about 35% over the past three months; the target valuation of 22x forward P/E is broadly in line with the company’s historical average since its emerging stock market listing in 2020.

  Risks

  Foldable smartphone penetration falling short of expectations, loss of market share in server components, and intensified competition putting pressure on margins.

• Nvidia VR200

  Main project driver for 3Q26 server QD shipments and revenue recovery.

  Strengths

  Involves both compute tray and switch tray QD, and is expected to contribute a sizable shipment increase.

  Weaknesses

  Orders had previously been deferred, and the project timetable has a significant impact on quarterly revenue.

  Comparison

  Compared with the 2Q26 product transition period, revenue momentum is expected to improve significantly after entering the shipment phase in 3Q26.

  Risks

  Mass production or customer pull-in may be delayed again.

• AWS Trainium 3 and Google TPU v8

  ASIC liquid-cooling QD projects expected to start ramping in 4Q26.

  Strengths

  Helps expand the server customer base and drive further sequential revenue growth in 4Q26.

  Weaknesses

  Contribution depends on projects ramping on schedule and remains at the forecast stage.

  Comparison

  Compared with growth in 3Q26 mainly driven by VR200, the related ASIC projects constitute an additional growth driver for 4Q26.

  Risks

  Project certification, mass production, or shipment schedules may fall short of expectations.

• Huawei foldable smartphone project

  Potential recovery driver for the smartphone hinge business in 2H26.

  Strengths

  Expected launches of inward-folding and tri-fold new products may bring initial pull-in orders.

  Weaknesses

  The company’s overall smartphone hinge business is still declining and has already led to cuts in 2026 and 2027 EPS forecasts.

  Comparison

  Compared with the server QD business, the smartphone business currently has weaker growth visibility and margin support.

  Risks

  New product sales or foldable smartphone penetration may fall short of expectations.

Key data

• 2Q26 adjusted EPSNT$12.39Below J.P. Morgan and market consensus expectations, mainly due to revenue missing expectations.
• 2Q26 revenue QoQ change-11%AI server QD and smartphone hinge businesses were in product transition periods.
• 2Q26 gross margin34%Above market expectations of 33%, and higher than 32% in 1Q26 and 29% in 4Q25.
• 3Q26 revenue forecastNT$4.6 billionExpected to grow 23% QoQ, driven by VR200 QD and pull-in orders for Huawei’s new foldable products.
• 3Q26 and 4Q26 gross margin forecasts35%／36%Above market expectations of roughly over 33% and over 34%.
• 2026 adjusted EPS forecastNT$61.17Cut by 9.4% from NT$67.52.
• 2027 adjusted EPS forecastNT$104.23Cut by 11.8% from NT$118.16.
• 2028 adjusted EPS forecastNT$140.47Introduced for the first time, reflecting further growth in the server business.
• Forecast server revenue mix at end-202660%A higher server business mix is expected to support structural margin expansion.
• Target price and current priceNT$2,600／NT$1,590The target price corresponds to approximately 63.5% potential upside.

Impact & implications

The short-term earnings forecast cut reflects weakness in the smartphone hinge business, but continued gross margin beats indicate that the earnings quality of the server QD business is improving. If VR200 and ASIC QD enter mass production as scheduled, Fositek is expected to resume revenue growth in 3Q26 and gain stronger operating leverage through a higher server business mix. The company’s share price has lagged TAIEX by about 35% over the past three months, and execution of project schedules plus continued gross margin upward revisions could become catalysts for valuation and market sentiment recovery.

Risks

• Foldable smartphone penetration is slower than expected.
• Market share loss in the server components business.
• Intensified industry competition puts pressure on gross margin.
• Mass production and shipments of VR200, ASIC QD, or other server projects are delayed again.
• The smartphone hinge business declines more than expected.

What to watch

• Actual mass production and shipment progress of VR200 QD in August 2026 and 3Q26.
• Whether 3Q26 revenue can achieve 23% QoQ growth to NT$4.6 billion.
• Whether 3Q26 and 4Q26 gross margins can reach 35% and 36%, respectively.
• Ramp-up of AWS Trainium 3 and Google TPU v8 liquid-cooling QD in 4Q26.
• Order pull-through and end demand after the launch of Huawei’s inward-folding and tri-fold new products.
• Whether the server revenue mix can rise to 60% by the end of 2026.
• Whether the smartphone hinge business deteriorates further and triggers another earnings forecast cut.