AI liquid-cooling market expands; cooling supply chain benefits but stock performance is differentiated

Overview

This report focuses on the Greater China technology hardware cooling-solution supply chain, with the core theme that the total addressable market for AI liquid cooling is expanding. The report argues that strong demand for AI servers and general servers will continue to support shipments of thermal-management components for air and liquid cooling. As designs such as the Vera Rubin POD, Groq 33LPX, Vera CPU rack, Bluefield 4 storage rack, and Spectrum-X CPO switch rack increase, liquid cooling is no longer limited to GPUs and CPUs, but expands to switches, optical modules, and a broader set of data-center infrastructure.

Core views

Morgan Stanley expects the cooling-solution coverage universe in Q2 2026 to set another quarterly record. AVC is viewed as the top pick among the four cooling stocks because it has demonstrated timely delivery of cold plate modules, enclosures, and manifolds to NVIDIA and major AI ASIC customers. Fositek also benefits from liquid-cooling quick-connect couplings, server rail kits, and foldable-phone opportunities. Auras benefits from the liquid-cooling trend but was given a lower target price, reflecting reduced earnings expectations in 2027-2028 and a more reasonable valuation. Sunon’s target price was also reduced, and the report is more cautious on its risk-reward.

Analysis framework

The report evaluates each company’s impact using earnings forecast revisions, target-price changes, residual income valuation models, scenario analysis, and key operating metrics, assessing effects from AI-server shipments, product mix, margins, capacity ramp, customer projects, and changes in liquid-cooling penetration.

Methodology notes

• Valuation methodResidual income model

  Base-case target price

  Target prices for AVC, Fositek, Auras, and Sunon are all primarily based on residual income or multi-stage residual income valuation models, consistent with methods used for technology hardware coverage names.

• Scenario analysisBull-bear scenario valuation

  Upside and downside valuation range

  The report provides bull and bear scenario valuation adjustments for AVC, Fositek, Auras, and Sunon to reflect different paths for liquid-cooling penetration, server demand, product mix, and competitive pressure.

• Earnings forecast2026 to 2028 earnings estimate revisions

  EPS and margin assumption updates

  Earnings revisions are mainly driven by stronger AI-related shipments, product mix improvements, margin assumption changes, and Vera Rubin platform uncertainty.

Asset mapping & comparison

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

• 3017.TW

  AVC, the key beneficiary of AI liquid cooling and server thermal management

  Strengths

  Has proven the ability to deliver cold plate modules, enclosures, and manifolds, and serves NVIDIA and major AI ASIC customers; AI server and liquid-cooling upgrades have supported upward EPS revisions.

  Weaknesses

  The stock has already significantly outperformed, making valuation more sensitive to execution and growth expectations.

  Comparison

  The report positions AVC as the preferred name among the four cooling stocks, with the stock up 53%, materially outperforming both the Taiwan Weighted Index and other cooling stocks.

  Risks

  AI server deployment slowing, product mix deterioration, intensifying industry competition, or slower-than-expected liquid-cooling design upgrades.

• 6805.TW

  Fositek, beneficiary of liquid-cooling quick couplings, server rail kits, and foldable smartphone exposure

  Strengths

  AI-related exposure is increasing, and a higher share of server business is expected to improve product mix and margins; the expected foldable iPhone opportunity may also lift foldable-phone penetration.

  Weaknesses

  Model transitions in smartphone hinge variants may make quarterly execution relatively subdued.

  Comparison

  The target-price increase is smaller than AVC but still reflects improvements in server and liquid-cooling businesses.

  Risks

  Slower liquid-cooling penetration in servers/data centers, slower adoption of foldable smartphones, and slower-than-expected progress in server rail kit projects.

• 3324.TWO

  Auras, a beneficiary of the liquid-cooling trend with a more reasonable valuation

  Strengths

  Steady ramp and operating leverage from the new Thailand fab are expected to support margin recovery; liquid-cooling-related revenue is expected to grow by more than 50% year-on-year in 2026.

  Weaknesses

  Vera Rubin project uncertainty has reduced mid-term revenue assumptions, and earnings estimates have been lowered for 2027-2028.

  Comparison

  The target price is lowered, contrasting with the upgrades for AVC and Fositek.

  Risks

  Slower-than-expected data-center thermal-design upgrades, stronger industry competition creating price pressure, and weakness in PC or graphics-card demand.

• 2421.TW

  Sunon, a traditional fan and cooling supplier: AI server shipments provide support, but risk-reward is weaker

  Strengths

  Higher AI server shipment assumptions lift 2026 revenue assumptions; product mix improvement supports margin recovery.

  Weaknesses

  Target price was lowered, with valuation seen as more in line with historical averages and lacking stronger upside catalysts.

  Comparison

  The report is more cautious on Sunon relative to AVC and Fositek.

  Risks

  Server demand below expectations, slower data-center thermal-design upgrades, stronger industry competition, and weak demand for PC/NB or VGA.

• US.NVDA

  Upstream demand driver and customer pull factor

  Strengths

  NVIDIA Rubin platform and server-rack upgrades are expanding demand for liquid-cooling components.

  Weaknesses

  This is not a research report on NVIDIA itself; information is used only to illustrate supply-chain demand drivers.

  Comparison

  AVC is considered potentially one of the outsourced cold plate module suppliers for the Rubin platform.

  Risks

  Platform launch cadence, AI server demand, or design-spec changes could affect supply-chain orders.

Key data

• AVC target price revisionRaised from NT$2,300 to NT$2,750Up 20%, reflecting higher 2026-2028 earnings expectations. The target price implies about 29x 2026 forward P/E.
• Fositek target price revisionRaised from NT$2,000 to NT$2,150Up roughly 8%, reflecting revised 2026-2028 earnings forecasts. The target price implies 36x 2026 forward P/E.
• Auras target price revisionReduced from NT$1,200 to NT$1,080Down roughly 8%, reflecting lower 2027-2028 earnings estimates. The target price implies 17x 2026 forward P/E.
• Sunon target price revisionReduced from NT$175 to NT$165Down roughly 6%, reflecting revised 2026-2027 earnings estimates and a higher forecast dividend payout ratio. The implied multiple is 16x 2026 forward P/E.
• AVC earnings forecast revision2026, 2027, and 2028 earnings estimate revised up 15%, 16%, and 17%, respectivelyDriven mainly by stronger AI-related shipments and higher margin assumptions.
• Fositek earnings forecast revision2026, 2027, and 2028 earnings estimate revised up 1%, 0.3%, and 8%, respectivelyDriven mainly by higher-margin assumptions from a stronger product mix.
• Auras earnings forecast revision2025 EPS revised up 12%; 2026 and 2027 EPS revised down 5% and 7%, respectivelyCold-plate shipment growth in 2026 lifts revenue, but Vera Rubin project uncertainty compresses medium-term revenue assumptions.
• Server business contributionBy 2026, server business contribution is expected to exceed 50% of total revenue at most covered namesThe report says companies with server contributions above 55% can benefit from scale effects and improved product mix.
• AVC stock performanceup 53%The Taiwan weighted index rose 26% in the same period; Fositek rose 6%, while Auras and Sunon fell 4% and 12%, respectively.

Impact & implications

As AI adoption of liquid cooling increases, the value of thermal components should rise, potentially improving margins and earnings leverage for relevant companies. For investors, the key is not just exposure to the AI theme, but whether companies can secure verifiable orders across NVIDIA, AI ASICs, server racks, CPO switches, and optical modules while maintaining delivery execution and profitability through capacity ramp. The AVC and Fositek upgrades reflect clearer benefits in liquid-cooling and server businesses; the Auras and Sunon downgrades indicate valuation, platform timing, competition, and end-demand still constrain returns.

Risks

• AI server and general server demand coming in below expectations.
• Liquid-cooling penetration in servers, data centers, switches, and optical modules is slower than expected.
• Vera Rubin and similar platform project timing and specs remain uncertain.
• Increasing industry competition may create pricing pressure and compress margins.
• Demand outside servers, such as PC/NB, VGA, or smartphones, weakens.
• Deteriorating product mix or a smooth capacity ramp could pressure margins.
• Lower-than-expected foldable smartphone penetration would reduce Fositek business resilience.

What to watch

• Whether AI server and general server shipments remain strong in Q2 2026.
• The actual implementation pace of liquid-cooling designs such as Vera Rubin PODs, CPO switches, optical modules, and storage racks.
• AVC’s delivery performance for cold plate modules, enclosures, and manifolds to NVIDIA and AI ASIC customers.
• Progress at Fositek in liquid-cooling quick couplings, server rail kits, and foldable smartphone projects.
• Auras ramp of the new Thailand fab, cold plate shipments, and margin recovery.
• Sunon’s share in AI server-cooling projects, product mix evolution, and changes in dividend assumptions.
• Whether industry competition and pricing pressure erode margin gains from liquid-cooling upgrades.