By Jacob Sonenshine

Artificial intelligence was the gift that kept on giving for Amphenol -- until it took a big chunk away this past week. It's time to buy the stock.

Amphenol makes cables, sensors, and all kinds of connectors for electricity and data used in cars, planes, mobile phones, and the data centers that power AI. The AI boom helped the stock notch a 22% annual total return over the past five years, easily outpacing the S&P 500 index's 15% rise, but it also meant that shares were in the crosshairs when the market took note of China's DeepSeek, a hyperefficient AI model that could mean less spending on data centers than investors had been betting on. Amphenol tumbled 13% on the news.

The timing was odd. The previous week, shares of Amphenol had jumped 7% after the company delivered what could only be considered sterling results. Fourth-quarter sales and earnings easily topped expectations and the high end of the company's own guidance. That's classic Amphenol. It hasn't seen a decline in profits since at least 2010 and has missed quarterly-earnings forecasts only twice during the past five years, according to FactSet. It's a rare combination of growth and stability.

Don't expect that to change. Amphenol is far more than just an AI stock. Its sales grew at a 21% clip in 2024, driven by data centers but also commercial aerospace, mobile devices, and defense markets. It plans to continue making acquisitions in a fragmented market -- its $15.2 billion in 2024 sales was a fraction of management's $125 billion estimate for annual spending on connectivity -- and buy back stock, further boosting earnings. If anything, this past week's pullback looks like a second chance for investors who missed buying Amphenol before its earnings popped.

"Buying it on a 15% pullback -- that's not a bad entry point at all," says Luke O'Neill, portfolio manager of the Catalyst Dynamic Alpha fund, which owns the stock.

Data centers have been a huge part of Amphenol's growth. The company is selling connectivity products for Nvidia's graphic processing units, sales of which have been growing rapidly as the world adopts AI. TD Cowen analyst Joe Giordano estimates that Amphenol's AI-specific sales are on track to reach over $1 billion this year. The worry now is that large-language models may require less computing power -- and fewer data centers -- than those from OpenAI and other U.S. companies.

The optimistic view is that customers will continue to increase their purchases of AI hardware over the long term, in line with Jevons Paradox, which holds that as a technology becomes cheaper and more accessible, demand for it increases.

Amphenol is diversified, and all three of its segments -- communications solutions, interconnect and sensor systems, and harsh environment solutions -- experienced growth in 2024. The company also can continue to expand through acquisitions, a large part of its strategy over the past decade. On July 18, it announced the purchase of CommScope Holding's mobile networks business, a deal that is expected to close in the first half of this year and will contribute just over $1 billion in annual sales, Amphenol said in its deal announcement.

And with over $2 billion in annual free cash flow -- and growing -- plus $3.3 billion in cash, Amphenol is able to purchase still more smaller players. The fact that it could theoretically pay off all of its $6.8 billion debt with just about three years of cash flow also allows it to prioritize acquisitions.

"It still has the capability, interest, and returns potential to invest ever greater amounts on acquisitions," writes Truist Securities analyst William Stein, who has a $102 price target on the stock, the highest on Wall Street, up nearly 50% from Wednesday's close of $69.38.

Amphenol has been able to deliver stellar growth even with headwinds in its automotive and industrial businesses. Those segments are subject to the fluctuations of global demand for cars and heavy equipment, but Amphenol typically grows revenue in these areas above the rate of economic growth.

The malaise in electric vehicles hasn't helped. EVs require more content per vehicle -- the number of connectors required -- than traditional vehicles, but demand and production have slowed in the past few years, partly as a result of high interest rates, and they face continued headwinds from Trump administration policies. Still, Amphenol's content per vehicle has risen about 17% annually over the past seven years, according to Vertical Research Partners. If the EV market begins to pick up, it would provide another boost to Amphenol's sales and earnings.

"I'm pretty positive once the EV market turns, it's going to be pretty significant for Amphenol," says Ivana Delevska, chief investment officer of Spear Advisors, which owns the stock.

All told, Amphenol should be able to grow total revenue by about 13% annually, to $19.5 billion, through 2026, from $15.2 billion in 2024, according to FactSet. Those sales should outpace expenses, which should help margins expand to 23% next year from 22.2% in 2025. Plus, management will still have some cash flow left over after acquisitions to buy back shares. It repurchased enough stock in the third quarter to bring its annual buyback pace to just over $700 million. As that continues, analysts see earnings per share growing at 16% annually over the coming two years, reaching $2.54 in 2026.

On the surface, Amphenol doesn't look cheap. Even after dropping 10% this past week on DeepSeek fears, the stock still trades at a lofty 30 times 12-month forward earnings, above the S&P 500's 21.9 times and its own five-year average of 28.7 times.

That's a reflection of Amphenol's consistency, but also its growth. It currently trades at about 1.8 times its expected EPS growth -- what's known as a PEG ratio -- down from an average PEG of 2.7 times over the past decade, according to Barron's calculations of FactSet data.

"We can debate valuation (and we have), but as long as organic growth stays at/near these double-digit levels...shares will likely have support," writes TD Cowen's Giordano.

And a springboard to future gains.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 30, 2025 09:23 ET (14:23 GMT)

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