AI New Product Ramp and Stronger Cash Flow Drive Growth; Target Price Raised to Rmb121

Overview

The report believes Foxconn Industrial Internet’s 2Q26 performance was broadly in line with expectations, with revenue up 22% QoQ and net profit up 24% QoQ. Although the rapid ramp of AI server racks caused gross margin to decline from 7.4% in 1Q26 to 7.0%, revenue scale expansion and cost control drove the expense ratio down to 1.4%, while operating profit still increased 22% QoQ. Looking ahead to 3Q26 and 4Q26, mass production of new GPU AI server racks, CPU and LPU racks, ASIC servers, CPO switches, new switch platforms, and foldable-screen iPhone-related products will drive continued QoQ growth in gross profit.

Core views

Foxconn Industrial Internet’s core advantages lie in its complete AI infrastructure product portfolio, global-scale manufacturing capabilities, shorter production cycle, supply chain bargaining power, and ability to continuously generate cash flow. U.S. local production requirements, tight raw material supply, and rising costs have raised industry entry barriers, and customers are expected to rely more on leading manufacturers with global delivery capabilities. Goldman Sachs believes the company will continue to gain market share through customer expansion, product specification upgrades, and the introduction of new categories, and will achieve valuation re-rating through earnings acceleration.

Analysis framework

The report makes its judgment by combining quarterly results breakdown, product shipment trends, operating cash flow, revisions to 2026—2028 P&L forecasts, comparisons with Bloomberg consensus, and peer valuation regression. The target price uses a near-term P/E methodology, determining the target multiple based on the regression of peer P/E ratios against next-year net profit growth and operating profit margin.

Methodology notes

• Valuation methodsNear-term P/E and Peer Regression

  Calculates the 12-month target price based on 2027 forecast earnings and a 25.2x target P/E.

  The target P/E is determined based on the regression relationship among peer P/E ratios, next-year net profit growth, and operating profit margin, and has been raised from the previous 23x to 25.2x to reflect stronger forward fundamentals.

• Earnings ForecastProduct-level and P&L Forecast

  Revises revenue, gross profit, and net profit based on shipments and profit contributions from products such as AI server racks and switches.

  Goldman Sachs raises its shipment assumptions for new GPU AI server racks, increasing 2027 and 2028 gross profit forecasts by 5% and 8%, respectively, and net profit forecasts by 3% and 6%, respectively.

• Relative ComparisonComparison of Goldman Sachs Forecasts with Market Consensus

  Compares revenue, gross profit, operating profit, and net profit forecasts with Bloomberg consensus.

  Goldman Sachs’ 2026 net profit forecast is 3% above consensus and 2027 is 17% above consensus, mainly reflecting a more positive view on the company’s market position in AI server racks, gross profit, and expense control.

Asset mapping & comparison

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

• Foxconn Industrial Internet (601138.SS)

  A direct beneficiary of demand growth for AI server racks, ASIC servers, and high-speed data center switches.

  Strengths

  Has global-scale manufacturing, a complete product portfolio, shorter production cycles, supply chain bargaining power, strong execution, and operating cash flow.

  Weaknesses

  The rapid ramp of AI server racks depresses consolidated gross margin, and profitability is highly dependent on economies of scale, expense control, and supply chain management.

  Comparison

  Goldman Sachs believes the company can achieve a target valuation above its own historical average through growth, global production capabilities, and market share gains; its 2027 net profit forecast is 17% above Bloomberg consensus.

  Risks

  AI server demand or profit may fall short of expectations, consumer electronics competition may intensify, new factory ramp-up may be slower than expected, and iPhone shipments may be lower than expected.

Key data

• 2Q26 Net ProfitRmb13.146bnUp 24% QoQ and 91% YoY, in line with the midpoint of company guidance.
• 2Q26 RevenueRmb306.783bnUp 22% QoQ and 53% YoY.
• 1H26 Operating Cash FlowRmb7.4bnUp 425% YoY, supporting capex, R&D, and subsequent capacity expansion.
• 1H26 GPU AI Server Shipment GrowthUp 320% YoYShows that the GPU AI server business is in a rapid ramp-up phase.
• 1H26 ASIC AI Server Shipment GrowthUp 300% YoYASIC servers continue to ramp, driving product portfolio expansion.
• 1H26 High-speed Switch Shipment GrowthUp 140% YoYThe statistical scope is 800G and above data center switches.
• 2027 Net Profit ForecastRmb95.529bnRaised by 3% versus the previous forecast and 17% above Bloomberg consensus.
• 2028 Net Profit ForecastRmb133.621bnRaised by 6% versus the previous forecast, corresponding to 40% YoY growth.
• Target Valuation25.2x 2027E P/EThe previous target multiple was 23x.
• 12-month Target PriceRmb121Previously Rmb107.2, implying 83.3% upside versus the reference share price.

Impact & implications

Expansion in demand for AI servers and high-speed switches is expected to drive Foxconn Industrial Internet’s revenue, gross profit, and net profit to maintain high-speed growth, while strong cash flow reduces constraints on growth from large-scale working capital, capex, and R&D investment. Expansion of the customer and product mix may strengthen the company’s leadership in AI infrastructure and bring valuation re-rating, but the rising share of low-margin server racks will also lead to coexistence of high revenue growth and margin pressure.

Risks

• Demand or profit from the AI server business is lower than expected.
• Intense competition causes expansion of the iPhone components business to fall short of expectations.
• New factory capacity ramp-up is slower than expected.
• iPhone shipments are lower than expected, weighing on related component demand.
• A higher share of AI server racks and rising raw material costs may further depress gross margin.
• Customer expansion, new platform introduction, or CPO switch mass production progress falls short of expectations.

What to watch

• Mass production and customer expansion progress for new GPU AI server racks in 3Q26 and 4Q26.
• Shipment ramp-up of CPU, LPU, and ASIC server racks.
• Mass production pace of CPO switches and other high-speed data center switches.
• Whether operating cash flow can continue to cover working capital, capex, and R&D investment.
• Impact of U.S. local production requirements, raw material supply, and cost changes on delivery and margins.
• Whether margin pressure can be offset by revenue scale, expense ratio improvement, and product mix upgrades.
• Whether 2027 earnings can deliver on Goldman Sachs’ more optimistic forecast versus market consensus.