Wired For Change: Foxconn's Tech Makeover Faces Growing Pains

seekingalpha10-04

Foxconn Technology Co., Ltd. is diversifying into EVs, AI, and semiconductors, but faces revenue declines, rising costs, and market overvaluation, impacting long-term success.Apple’s shift to India ...

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Robert Way Thesis Foxconn Technology is having an epiphany. They primarily manufactured components for electronics but are now an industry leader, producing parts for Apple and entering new markets such as electric vehicles, artificial intelligence, and semiconductors. I think these might bring new opportunities, but the company is really struggling with some serious problems: revenue is down and costs are rising. Plus, being a bit overpriced in the market could mess with their long-term success. Foxconn's Origins and Focus Foxconn Technology Co., Ltd. (OTCPK:FXCOF) and (2354:Taiwan) is a Taiwanese multinational electronics manufacturer, and it's a part of the Hon Hai Precision Industry (OTCPK:HNHAF) umbrella. Terry Gou founded the company back in 1974. Foxconn started as an extension of Hon Hai in 1990, mainly focusing on making mechanical parts and casings—like the metal and plastic components used in electronics. While it's part of a bigger conglomerate, Foxconn's expertise is in that specific part of the electronics manufacturing process. Today, it's the world’s largest contract electronics manufacturer and plays a major role in global tech supply chains. Their headquarters is in Tucheng, New Taipei City, Taiwan. Global Tech Partnerships Foxconn’s claim to fame is assembling products for big names like Apple (AAPL), Sony (SONY), and Microsoft (MSFT). And in just over a decade ago, they hit a high watermark, cranking out about 40% of the world’s consumer electronics. They’ve got factories all over the place—China, India, the U.S.—with hundreds of thousands of people working for them. Yet, Foxconn's recent shift in production strategy reflects more than just global expansion—it's a strategic pivot with profound implications for the tech world. This year, Apple’s iPhone Pro and Pro Max are getting made in India for the first time, with Foxconn’s Tamil Nadu factories rolling out these high-end models. Apple’s Strategic Shift This shift is part of Apple's bigger plan to cut down its reliance on China, especially with all the rising geopolitical tensions. And since Foxconn is Apple’s top supplier, they’re right in the middle of this change. In 2024, Apple already made about 14% of its iPhones in India, and that number’s expected to go up fast. But it’s not just about moving away from China. By making iPhones in India, Apple can drop prices by up to 10% for the local market, dodging those heavy import duties. Even though importing components still keeps the prices higher than in other places, it’s a smart play for India. At first glance, this strategy looks like a smart way to spread out risk and better meet local demand. But it’s also a nod to the risks of putting too much manufacturing power in one place—specifically, China. Apple’s market share in China is shrinking, and they’re facing serious competition from local players like Huawei, which adds another layer to the story. Moreover, Foxconn’s growing footprint in India shows just how crucial they still are to the global electronics game, even as they shift away from their heavy reliance on China. Still, Foxconn's fast growth in India could bring some new headaches, like labor and infrastructure issues, which makes you wonder if they can hit the same level of precision and efficiency as their factories in China. And sure, the India-made iPhones will cover local demand, but those premium models are still mostly headed for Western markets. On a certain level, in my opinion, this move by Apple seems more like a play for optics and diversification than a full-on transformation. Regardless, Foxconn—and Apple by extension—making a bold shift away from China could signal a future where “Made in India” turns into a tech status symbol. Foxconn's Expansion Into EVs Seeking Alpha So, Foxconn, once known mainly for putting together iPhones, has seriously reinvented itself recently. In 2023, they pulled in $2.4 billion in (declining) revenues and are now making big moves in areas like electric vehicles (EVs), AI, and semiconductors. This is a shift towards Foxconn's clear ambition to lead in some of the most game-changing tech of the 21st century, way beyond their old-school manufacturing roots. In just a few years, they've rolled out EV prototypes like the Model N cargo van and Model C SUV, teaming up with companies like Nvidia (NVDA) to add AI, autonomous driving, and next-gen communication tech into their vehicles. These collaborations are all part of Foxconn's bigger plan to speed up development using modular and platform-based designs. AI as a Cornerstone Now that AI is a key part of Foxconn’s new direction, in Q2 of 2024, they saw a 6% bump in profits, thanks to the growing demand for AI servers which make up over 40% of their server revenue. Moreover, they’re gearing up to ship servers with Nvidia’s GB200 chips later in 2024, which will push them even deeper into the AI-driven computing game. Semiconductors and Strategic Partnerships But Foxconn’s shift isn’t just about AI. The company is also making moves in semiconductors, teaming up with Infineon to develop high-performance chips for EVs. This fits right into their bigger plan to dominate interconnected industries, whether it’s in mobility, AI, or manufacturing, they’ve built a strong foundation for this by tapping into their unmatched global manufacturing know-how, which has always been their biggest strength. Seeking Alpha Foxconn’s August 2024 revenue shot up by 32.81%, thanks mostly to the demand for AI servers, showing a possible momentum shift in those annual rev declines moving forward. Even with a slight dip from the previous month, according to management, they’re still feeling good about the rest of 2024. The company expects growth in the third quarter, especially in cloud and networking products, with AI server demand staying strong — possibly riding this AI-driven growth into 2025 and beyond. Even with all the wins, Foxconn still faces some challenges as it branches into new areas, especially in industries like automotive, where it doesn’t have much experience. Their bold move into the EV market—like with the MIH Alliance—shows both the risks and potential payoffs of this strategy. Whether they can turn their manufacturing strength into long-term success in these new sectors is still up in the air, but the stakes are high. If they pull it off, Foxconn’s transformation could have a considerable impact on their bottom line. Financial Performance Overview Foxconn Income Statement (Seeking Alpha) When I look at Foxconn’s financials, the revenue decline recently really jumps out: back in 2020, they were pulling in $3.7 billion, but the trailing twelve months (TTM) show they’re down to $1.75 billion — that’s more than a 50% drop, which signals some serious underlying issues. Seeking Alpha What’s even more concerning is how Foxconn has struggled to cut costs in sync with this revenue decline; while revenue has taken a nosedive, their cost of revenue hasn’t fallen as quickly, which is eating into their profit margins. The TTM gross profit was just $158.7 million, a far cry from the $479.9 million they made back in 2017. Comparison to Broader Market Fast Graphs Despite these declines, FXCOF achieved a steady 9.03% annual return from September 2022 to 2024, which is solid compared to the S&P 500’s (SP500) 6.77% without dividends. The fact that Foxconn doesn’t offer dividends, however, makes it less attractive to regular income-seekers; the S&P 500, conversely, with its steady 5%+ dividend growth, definitely wins in that department. But even without dividends, Foxconn’s prices have grown well, and they managed a 9% return despite supply chain woes and inflation – no mean feat. Foxconn’s Valuation Fast Graphs When I looked at FXCOF’s numbers, I used Operating Income (EBIT) instead of Adjusted Operating Earnings (AOE) since we don’t have specific AOE data, and there don’t seem to be any big one-time items skewing the numbers.   Seeking Alpha What I found wasn't surprising, as we just covered the declining revenues: Operating Income took a serious hit, dropping from $92.8 million to $40.1 million over the last twelve months. Overall, that kind of decline in EBIT doesn’t help. That earnings growth hasn’t kept up either, with the P/E ratio sitting at 24.78, simply means people are paying up for the stock, but the company’s earnings aren’t backing that up. Bottom line: the fair value ratio of 15x suggests FXCOF might be overpriced right now. Final Takeaway I’d call Foxconn a “Hold.” They have good opportunities in new segments like AI servers, EVs, and semiconductors, but that massive revenue decline and declining margins put a damper on their near-term prospects. Not to mention the stock is overvalued right now, but if they can get their shift into these emerging markets right, there might be some gains over the long term.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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