Goldman Sachs maintains Buy on AVC; rising AI server liquid-cooling penetration is the key driver

Overview

This is a Goldman Sachs earnings review and valuation update on AVC (3017.TW). The report focuses on the upside surprise in 1Q26 results, a short-term 2Q26 revenue disruption from AI server rack model transitions, and the lift to liquid-cooling penetration and component shipments from ramping GPU and ASIC AI server racks in 2H26. Goldman Sachs maintains its Buy rating and NT$3,536 12-month target price.

Core views

The core view is that AVC's earnings quality is benefiting from a higher share of AI server liquid-cooling components. 1Q26 revenue was broadly in line with expectations, but gross profit, operating profit, and net profit all exceeded Goldman Sachs and market expectations, with gross margin improving to 29.8%. Although April revenue came in below expectations and May is expected to be similar to April, Goldman Sachs expects growth to recover from June to September on the back of new AI server racks and ASIC AI servers. The report keeps 2026-2028 revenue mostly unchanged, raises gross margin assumptions, and at the same time lifts expense ratios due to higher R&D spending associated with liquid-cooling spec upgrades and broader adoption, leaving net profit forecasts broadly unchanged.

Analysis framework

The report combines earnings decomposition, monthly and quarterly revenue tracking, earnings forecast revisions, and relative valuation analysis. On the earnings side, it compares AVC's actual 1Q26 revenue, gross profit, operating profit, and net profit against Goldman Sachs forecasts and Bloomberg consensus; on the operating side, it focuses on AI server rack transitions and changes in the product mix of liquid-cooling components; on the valuation side, it uses a near-term P/E framework within the Taiwan technology coverage universe, deriving the 12-month target price from 26.7x 2027E EPS and comparing it with the P/E, net profit growth, and PEG ranges of AI server and liquid-cooling peers.

Methodology notes

• Valuation methodsNear-term P/E valuation

  Derive the 12-month target price from 26.7x 2027E EPS

  Goldman Sachs maintains a target P/E of 26.7x 2027E EPS, referencing the relationship between EPS growth and P/E multiples among PC/server peers, and believes this multiple is above AVC's historical forward P/E average plus one standard deviation, reflecting its benefit from higher liquid-cooling penetration in AI servers.

• Relative valuationPEG comparison

  The target price implies a PEG of about 0.8x

  AVC's target price corresponds to a PEG of about 0.8x, within the roughly 0.7x to 1.2x range for AI server and liquid-cooling peers, used to test the relative reasonableness of the target valuation.

• Company factorGS Factor Profile

  Growth, Financial Returns, Multiple, and Integrated four-factor profile

  Goldman Sachs' factor framework compares stocks with the market and industry peers through growth, financial returns, valuation multiples, and integrated metrics to provide an investment backdrop, but the core investment conclusion in this report comes primarily from earnings, forecasts, and valuation analysis.

Asset mapping & comparison

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

• AVC (3017.TW)

  The subject company of the report, benefiting from rising demand for AI server liquid-cooling components

  Strengths

  1Q26 gross margin and net profit beat expectations; AI server liquid-cooling product mix improved; revenue and EPS are expected to keep growing through 2026-2028; the target price implies a PEG within a reasonable peer range.

  Weaknesses

  April revenue was below expectations, with the near-term impact of AI server rack model transitions; higher R&D spending has led to an upward revision in expense ratio assumptions.

  Comparison

  Compared with lower-P/E, lower-growth peers such as Pegatron, Gigabyte, and Hon Hai, AVC trades at 26.7x 2027E P/E, roughly 32% average net profit growth in 2027-2028E, and about 0.8x PEG, with a valuation above some Taiwan hardware peers but also stronger growth.

  Risks

  Liquid-cooling adoption slower than expected, AI server demand weaker than expected, intensifying competition, and a slower-than-expected recovery in general-purpose servers.

• AI server liquid-cooling industry chain

  The core demand source and valuation reference range for AVC growth

  Strengths

  Ramp-up in GPU and ASIC AI server racks is lifting liquid-cooling penetration, benefiting cooling and liquid-cooling component suppliers.

  Weaknesses

  Demand timing may be affected by platform transitions, customer pull-forward or pull-back behavior, and specification upgrades.

  Comparison

  Peers such as Envicool and Vertiv have higher valuations and growth, reflecting the market's premium pricing for liquid cooling and data center infrastructure growth.

  Risks

  Liquid-cooling penetration falls short of expectations, slower AI capex, and competitive pressure on pricing or margins.

Key data

• 1Q26 revenueNT$49,038mnUp 110% year on year and 3% quarter on quarter, broadly in line with Goldman Sachs' forecast and Bloomberg consensus.
• 1Q26 gross margin29.8%Above Goldman Sachs' 26.9% forecast and 28.3% consensus, reflecting an improved product mix in AI server liquid-cooling components.
• 1Q26 net profitNT$7,916mnUp 146% year on year and 19% quarter on quarter, 10% above Goldman Sachs' forecast and 2% above consensus.
• April revenueNT$15,631mnDown 13% quarter on quarter and 14% below Goldman Sachs' forecast, mainly due to AI server rack model transitions.
• 3Q26E revenueNT$60,805mnGoldman Sachs expects 21% quarter-on-quarter growth versus 2Q26E revenue of NT$50,072mn.
• 2026E revenueNT$228,608mnForecast broadly unchanged, implying about 64% year-on-year growth.
• 2027E EPSNT$132.17The forward annual EPS base used for target P/E valuation.
• Target priceNT$3,536Based on 26.7x 2027E EPS, maintaining the Buy rating.

Impact & implications

The report is positive for AVC: a higher mix of AI server liquid-cooling components is improving gross margin and could further support shipment growth in 2H26 as GPU and ASIC AI server racks ramp. Near-term revenue is being affected by rack model transitions, but Goldman Sachs sees this as a timing issue rather than a reversal in demand trends. If liquid-cooling penetration continues to rise, AVC could sustain strong revenue and profit growth through 2026-2028 and command a valuation premium above its historical average.

Risks

• Liquid-cooling adoption slower than expected.
• AI server demand weaker than expected.
• Competition more intense than expected.
• General-purpose server recovery slower than expected.
• Short-term revenue volatility caused by AI server rack model transitions.

What to watch

• Whether revenue from June to September 2026 recovers growth momentum as the report expects.
• The pace of GPU and ASIC AI server rack ramp-up and the resulting pull-through for liquid-cooling component shipments.
• Whether gross margin can stay within the forecast range of roughly 29.7%-30.0%.
• Whether higher R&D spending will suppress operating margin improvement.
• Progress in liquid-cooling penetration and adoption of new applications such as CPO switch.
• The impact of changes in peer P/E, net profit growth, and PEG ranges on AVC's target valuation.