Flex Ltd FLEX witnessed strong momentum in the past year, with its shares rising 27.4% compared with the industry’s decline of 33.1%. It has also outpaced the S&P 500 composite’s growth of 25.7%. 

Price Performance

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FLEX was up 2.6% last day and closed the trading session at $38.64, down 9% from its 52-week high of $42.47. Does this recent pullback indicate a buying opportunity?

Strengthening Demand Trends Bode Well for FLEX

Flex has evolved into an end-to-end solutions provider where it is engaged in design, procurement, manufacturing and supply services for a broad range of products from electronics to athletic shoes. In addition, the company offers value-added services in design, metal, components, supply-chain management integration and aftermarket services, like circular economy. These additional capabilities and a diversified end-market are key positives for the company’s business model.

FLEX’s performance is buoyed by healthy demand trends across cloud, power and medical devices. The rapid AI proliferation in the data center vertical has been driving increasing demand for cloud solutions.

The company remains focused on cloud, power and automotive businesses by launching strategic programs, which is reflected in the top-line performance for the fiscal second quarter. The initiatives are likely to positively impact Flex’s performance in the fiscal third quarter as well as the latter half of the fiscal year.

In the fiscal second quarter, Flex’s cloud and data center power business expanded 40% from the prior-year period, which is double of its expected long-term CAGR of 20%. Its innovative suite of power products and services enhances customer satisfaction. All these factors are favorably positioning Flex for the AI-powered technology shift, prevalent in the industry from grid to chip and the cloud to the edge.

Disciplined operational execution and a favorable product mix are likely to drive its margin performance.

Acquisitions: Another Catalyst for FLEX

Acquisitions, over time, have been Flex’s most favored mode for expanding its manufacturing footprint as well as penetrating new end markets.

In October 2024, Flex announced its decision to acquire Crown Technical Systems for $325 million in an all-cash deal, augmenting the company’s footprint in fast-growing and profitable markets, particularly in modular data center adoption and medium-voltage power distribution. Synergies from the acquisition are likely to support its long-term goal of increasing the company’s shareholder value by driving margin expansion, EPS growth and robust cash generation. The buyout is expected to be finalized by December 2024, pending standard closing conditions, including regulatory approvals.

In May 2024, Flex enhanced its portfolio with the acquisition of FreeFlow. FreeFlow is a premium service provider in global secondary markets, specializing in asset disposition, digital circular economy tracking and reporting capabilities. The strategic buyout aims to expand Flex’s service footprint across emerging markets, such as data center, enterprise and lifestyle, unlocking new sources of revenues and fostering sustainability through second-life products.

Macro Headwinds Remain Concerns for Flex

Flex expects macro headwinds to persist throughout 2024, adversely impacting various end markets. It has lowered its revenue outlook for fiscal 2025. Flex now expects revenues in the range of $24.9-$25.5 billion compared with the prior estimation of $25.4-$26.4 billion. For the Reliability Solutions business, Flex forecasts third-quarter sales to remain flat to down mid-single digits, owing to macro weaknesses in the automotive vertical.

Agility Solutions’ revenues are anticipated to be down low to high single digits amid growth expected in cloud and other end markets. An increase in global tax rates is also concerning. Amid strength in data center power, a slowdown in the industrial sector, notably the renewable space, continues to pose headwinds. Slackening trends (except cloud) in enterprise IT and telco spending coupled with cautious consumer spending pose headwinds.
Stiff competition and a high debt load are additional headwinds.

FLEX’s Premium Valuation

FLEX stock is trading at a premium with a forward 12-month Price/Earnings ratio of 14.46X compared with the industry’s 12.94X. Though the lofty valuation indicates high expectations for growth, the near-term prospects of the company remain somewhat muddled.

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Looking at Estimate Revision Activity for FLEX

Analysts are bearish about the stock, which is evident from the downward revision in earnings estimates.

In the past 60 days, analysts have decreased their earnings estimates for the current and the next quarter by 1.6% and 3% to 63 cents and 65 cents per share, respectively.

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FLEX’s Zacks Rank

Flex carries a Zacks Rank #3 (Hold) at present. Though healthy demand trends across medical devices, cloud and data center power verticals bode well. Weakness in core industrial, limited enterprise IT spending and a dynamic macro backdrop remain concerns.  Consequently, it might not be a prudent investment decision to bet on the stock right now.

Stocks to Consider

Some better-ranked stocks from the broader technology space are Plexus Corp., Inc. PLXS, InterDigital, Inc. IDCC and Celestica CLS, each presently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for PLXS’ fiscal 2025 EPS is pegged at $6.79, unchanged in the past seven days. PLXS’ earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, while missing once, with the average surprise being 10.3%. Its shares have increased 46% in the past year.

The Zacks Consensus Estimate for IDCC’s 2024 earnings is pegged at $15.22, up 12.5% in the past 30 days. IDCC’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 163.7%. Its shares have surged 71.3% in the past year.

The Zacks Consensus Estimate for CLS’ 2024 EPS is pegged at $3.85, up 5.5% in the past 60 days. Celestica’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 13.2%. The stock has inched up 220.1% in the past year.

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