AI Data Center And Liquid Cooling Exposure Will Eventually Pressure Margins And Earnings

Catalysts

About Jabil

Jabil is a manufacturing solutions provider focused on complex electronics, systems integration and related services across multiple end markets.

What are the underlying business or industry changes driving this perspective?

• Jabil is heavily leaning into AI data center build outs. If customers moderate infrastructure plans or shift more work in house, the large AI related revenue tied to Intelligent Infrastructure could prove cyclical and could pressure future revenue and earnings.
• The company is rapidly expanding capacity for liquid cooling, power systems and silicon photonics. If industry standards evolve or adoption patterns change, these specialized assets could be underused and could weigh on margins and returns on invested capital.
• Exposure to hyperscalers, neocloud providers and high speed networking concentrates demand in a small group of large buyers. Any change in their procurement strategies or vendor consolidation efforts could affect pricing power, compress net margins and slow EPS growth.
• Physical AI, robotics and warehouse automation are still at an early commercialization stage. If high costs and technical complexity persist for longer than expected, Jabil’s automation focused programs may scale more slowly and could limit contribution to segment revenue and operating margin.
• Automotive, renewables and health care equipment are recovering from prior headwinds. If this rebound stalls or reverses while Jabil has already invested in added capabilities and capacity, utilization could soften and could constrain both core operating margin and free cash flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Jabil compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Jabil's revenue will grow by 13.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.6% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach $2.0 billion (and earnings per share of $18.75) by about June 2029, up from $862.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.8x on those 2029 earnings, down from 45.9x today. This future PE is lower than the current PE for the US Electronic industry at 32.1x.
• The bearish analysts expect the number of shares outstanding to decline by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.11%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI related demand in Intelligent Infrastructure is currently strong, with segment revenue of US$4b in Q2 and an outlook that includes US$10.4b of cloud and data center infrastructure and US$13.1b of AI related revenue in fiscal 2026. If this demand proves more durable than expected, it could keep revenue and earnings higher than a bearish view assumes and support company valuations.
• Management is calling out broad based strength across automotive, renewables and health care within Regulated Industries, with that segment delivering US$3b of Q2 revenue, 10% year over year growth and an increased full year outlook of US$12.5b. A sustained recovery in these more traditional end markets could offset any slowdown in AI data center orders and support overall revenue and core operating margin.
• Digital Commerce and warehouse automation are described as growing areas, with ongoing contribution from robotics, advanced warehouse and retail automation and comments that Digital Commerce is one of the highest margin end markets. Continued adoption of automation and physical AI in warehouses and retail could support segment margins and core EPS even if some consumer electronics exposure remains soft.
• The company reports strong cash generation and capital discipline, including Q2 adjusted free cash flow of US$360m, an expectation of more than US$1.3b of adjusted free cash flow in fiscal 2026, low net capital expenditures of US$51m in Q2 and an asset light approach in Intelligent Infrastructure. If this combination persists it could support resilient free cash flow and returns on invested capital, which may limit downside in the stock.
• Management’s focus on margin expansion, mix improvement and internal use of AI in operations, along with a current core operating margin of 5.3% in Q2 and a full year outlook of about 5.7%, indicates that operational efficiency and higher value capabilities such as liquid cooling, power systems and silicon photonics could support net margins and earnings over time even if revenue growth moderates.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Jabil is $377.62, which represents up to two standard deviations below the consensus price target of $441.44. This valuation is based on what can be assumed as the expectations of Jabil's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $482.0, and the most bearish reporting a price target of just $365.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $48.9 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 9.1%.
• Given the current share price of $374.64, the analyst price target of $377.62 is 0.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.