The Questioned "First AI Stock"

Since 2023, with the sustained popularity of ChatGPT, major cloud service providers have continuously increased their investment in AI, allowing "the seller of shovels" NVIDIA to dominate the US stock market, with a market value that once surpassed giants like Microsoft and Apple to become the highest in the world. Driven by NVIDIA, AI and computing power concept stocks in the A-share market have been sought after by various funds. Among them, Foxconn, known as NVIDIA's "shadow stock," has also benefited significantly, with a cumulative increase of over 300%.

As an important partner of NVIDIA, Foxconn has been developing and mass-producing high-performance AI servers such as the H100 and H800 for customers since 2023. It also holds a significant share in the shipment of the next-generation AI server GB200, which is equipped with the Blackwell chip. Since 2024, North American cloud service providers have been competing to release large models, further increasing the demand for AI servers, which has also led to a surge in orders for Foxconn from overseas cloud service providers such as Microsoft and Amazon.

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However, with the continuous speculation of funds, many investors have begun to feel uneasy about the bubble in the AI sector. Especially since the second half of the year, the commercialization of AI large models seems not as optimistic as expected, leading to some investors' questioning of the future of AI. Against this backdrop, the stock prices of AI star companies such as NVIDIA and Super Micro Computer have clearly shown signs of fatigue from being "too high to bear." Among them, Super Micro Computer's cumulative decline in the past six months once approached 70%, further triggering panic selling in AI.

When the city gate catches fire, it affects the fish in the moat. Since reaching a historical high in July 2024, Foxconn's stock price has continued to decline, with a cumulative drop once exceeding 30%, and over 200 billion yuan in market value was brutally evaporated, and the "first AI concept stock" seemed to lose its appeal in an instant. It was only in the recent overall stock market surge that it once again welcomed a rebound in stock prices.

In fact, if we look at the long cycle, over the past year and a half, Foxconn's stock price has experienced a roller coaster ride of doubling, then halving, and then doubling again, comparable to a dramatic TV series. Foxconn, which has caught up with the AI wave, is like an elephant on the风口, achieving a transformation from being ignored to being sought after, from a "sweatshop" to a "light of technology," or perhaps an illusory bubble.

The elephant that stepped on the trend

In 2015, Terry Gou, who was not satisfied with being only a contract manufacturer, split out the Internet of Things, robotics, and AI-related businesses of Foxconn Precision and repackaged them into a new subsidiary, Foxconn was born. In 2018, Foxconn successfully went public on the A-share market. According to Terry Gou, "Foxconn is no longer a contract manufacturer, Foxconn wants to create an industrial internet, and Foxconn is also among the forefront of technologies such as AI and big data."

As the vanguard of Foxconn's transformation, Foxconn's main business covers three major segments: communication and mobile network equipment, cloud computing, and industrial internet. In 2023, Foxconn's revenue from communication and mobile network equipment, cloud computing, and industrial internet was 279 billion, 194.3 billion, and 1.646 billion, respectively, accounting for 58.57%, 40.79%, and 0.35%, respectively.

Among them, the communication and mobile network equipment segment is Foxconn's traditional business, with main products including high-speed switches and routers, terminal precision structural parts, network communication equipment, and other products. Downstream customers include giant companies such as Apple, Cisco, HPE, Huawei, Amazon, etc. At the beginning of the company's listing, the communication and mobile network equipment business once accounted for more than 60% of Foxconn's total revenue, belonging to the company's largest source of income.Compared to the traditional business of communication and mobile network equipment, Foxconn Technology Group's cloud computing business has garnered more attention from the outside world. Its main products include cloud servers, high-performance servers, AI servers, edge servers, and cloud storage devices, with downstream clients including giants such as NVIDIA, Amazon, JD.com, and Alibaba.

Industrial Internet business is Foxconn Technology Group's third major business segment, primarily comprising three services: excellent manufacturing consulting and Lighthouse Factory solutions, one-stop digital manufacturing operations, and cloud and platform services. According to the latest annual report, Foxconn Technology Group added the empowerment of three world-class Lighthouse Factories in 2023, cumulatively helping to build nine Lighthouse Factories. Due to the low revenue share, the impact of Foxconn Technology Group's Industrial Internet business on the company's overall performance is very limited.

In Terry Gou's vision, Foxconn Technology Group encompasses the most valuable businesses within Foxconn Precision Industry, bearing the heavy responsibility of the group's high-tech transformation. However, since its two core businesses (communication and mobile network equipment business, cloud computing business) are both in the OEM model, Foxconn Technology Group's profitability is very limited.

Data shows that from 2018 to 2022, Foxconn Technology Group's sales gross margin was 8.64%, 8.38%, 8.35%, 8.31%, and 7.26%, respectively, always maintaining in the single-digit range and overall showing a downward trend year by year. In comparison, Foxconn's gross margin is around 6%, and although Foxconn Technology Group's profitability has improved, it is still very limited.

Therefore, in the eyes of most investors, Foxconn Technology Group listed on the A-share market has not fundamentally gotten rid of the OEM business model, leading to the company's stock price being sluggish for a long time. Data shows that from June 2018 to October 2022, Foxconn Technology Group's stock price fell from the highest of 24.15 yuan to the lowest of 6.67 yuan, and the total market value fell from 467 billion yuan to 140 billion yuan, with more than 320 billion yuan of market value being evaporated in just over four years.

Entering 2023, with the emergence of ChatGPT, countries have been increasing their investment in AI, and Foxconn Technology Group's stock price has also taken off. In March 2023, Foxconn Technology Group's stock price soared by 90% in one month. In July 2023, Foxconn Technology Group's market value rose to 520 billion yuan, achieving a brilliant market value doubling in five months.

However, since the second half of 2023, Foxconn Technology Group's stock price has begun to peak and fall back, and the market value has been halved in seven months, causing heavy losses for many investors who chased high.

In retrospect, compared with the explosive performance of NVIDIA, Foxconn Technology Group's operating performance is obviously not as fierce as its stock price performance, becoming a fundamental reason for its stock price to frequently "roller coaster."

It is not easy to turn around.

Data shows that in the whole year of 2023, Foxconn Technology Group achieved a revenue of 476.34 billion yuan, a year-on-year decrease of 6.94%, which is the first time the company's revenue has declined since 2020; it achieved a net profit of 21.04 billion yuan, with a year-on-year increase of about 4.82%. Looking at the business, Foxconn Technology Group's three major businesses of communication and mobile network equipment, cloud computing, and industrial Internet all fell into a year-on-year decline in revenue, especially its core business of communication and mobile network equipment, with a revenue reduction of nearly 20 billion yuan.In the realm of Foxconn's communication and mobile network equipment, high-end precision structural components constitute the most core business, which mainly includes smartphone accessories such as phone casings and mid-frames, with Apple being its largest customer. From 2018 to 2021, affected by the annual decline in smartphone shipments, Foxconn's high-end precision structural component business stagnated for four consecutive years. Although there was an improvement in 2022, the business fell into negative growth again in 2023.

It is not difficult to see that despite the enhancement of the AI concept, Foxconn did not deliver a satisfactory report card for investors in 2023, which also led it into a "double kill by Davis" situation.

Entering 2024, the rapid development of large language models (LLMs) and generative AI has driven a strong increase in downstream AI server demand, and Foxconn's stock price has ushered in a significant rebound. On July 11, Foxconn's market value once reached a historical high of 560 billion yuan, successfully doubling from the low point (240 billion yuan) at the beginning of 2024.

Although the elephant is once again facing the wind, Foxconn's semi-annual report performance is not outstanding. According to the latest financial report, in the first half of 2024, Foxconn achieved a revenue of 266.091 billion yuan, a year-on-year increase of 28.69%, and a net profit attributable to the parent company of 8.739 billion yuan, a year-on-year increase of 22.04%. Among them, in the second quarter of 2024, the company achieved a revenue of 147.403 billion yuan, a year-on-year increase of 46.11%, and the net profit attributable to the parent company was 4.554 billion yuan, a year-on-year increase of 12.93%, and the net profit excluding non-recurring gains and losses was 4.261 billion yuan, a year-on-year decrease of 1.58%.

Looking at the semi-annual performance, Foxconn's revenue and net profit in the first half of the year both set a new high for the same period since the company went public, mainly benefiting from the explosion of AI server demand. In the first half of 2024, Foxconn's cloud computing revenue increased by 60% year-on-year, with cloud service providers' revenue accounting for 47%, an increase of 5 percentage points compared to the same period last year; AI servers accounted for 43% of the overall server revenue, with revenue increasing by more than 230% year-on-year.

Compared with the rapidly growing cloud computing business, Foxconn's communication and mobile network equipment business only achieved single-digit growth in the first half of the year, among which, the overall revenue of 400/800G high-speed switches increased by 30% year-on-year, and the 800G switch has started shipping in 2024, with products covering the composite structure of Ethernet, IB network, and NVlinkSwitch.

For a long time, the communication and mobile network equipment business has been Foxconn's largest source of revenue. However, with the explosion of AI server demand, Foxconn's revenue structure has undergone a significant change. Especially in the second quarter of 2024, Foxconn's cloud computing revenue accounted for 55% of the total revenue, becoming the company's largest source of revenue.

However, looking at the second quarter's net profit excluding non-recurring gains and losses data, Foxconn seems to have encountered a problem of increasing revenue without increasing profits, mainly affected by exchange rate gains and losses. In addition, looking at the gross margin, Foxconn's sales gross margin in the first half of the year was 6.73%, a significant decline from the 2023 full-year level (8.06%), which is also an important reason for the pressure on its profit side.

In fact, although the name of AI servers seems high-end, the essence of Foxconn's server business is just an assembly business with both ends outside. On the one hand, Foxconn needs to purchase core components such as CPUs and GPUs from upstream companies such as NVIDIA and AMD. On the other hand, the company's downstream customers are mainly global cloud computing giants such as Google, and Foxconn also lacks pricing power.

It is not difficult to see that Foxconn is only playing the role of a contract manufacturer in the industry chain, which also leads to its very thin gross margin. Data shows that in 2023, Foxconn's cloud computing business gross margin was about 5%, far lower than its communication and mobile network equipment business gross margin (9.8%). Therefore, the rapid growth and proportion increase of cloud computing revenue have actually lowered Foxconn's overall gross margin level.All along, Foxconn Industrial Internet has been seen as Nvidia's "shadow stock" in the A-share market, but its profitability is far from that of the latter. According to the latest financial report, Nvidia achieved a total revenue of $30 billion in the second quarter, a year-on-year increase of 122%; net profit was $16.6 billion, a year-on-year increase of 168%; the overall gross margin was 75.7%, of which the GPU business gross margin reached as high as 90%.

Just recently, in response to external doubts about the prospects of artificial intelligence, Nvidia CEO Huang Renxun said in a technology talk organized by Goldman Sachs that the market demand for AI chips is at an unprecedented peak, and the company's latest "strongest AI chip" Blackwell is very popular with customers and is currently in a state of supply shortage.

Stimulated by Huang Renxun's speech, Nvidia's stock price rose by more than 8% on September 12. As of the close of the most recent trading day, Nvidia's market value has returned to more than $3 trillion.

With the rebound of Nvidia's stock price, Foxconn Industrial Internet's stock price has also started to rebound. However, in fact, although it has repeatedly claimed to be a "high-tech" company, Foxconn Industrial Internet is still far from being able to live up to its name, and what it earns is just a hard-earned money on the assembly line. To truly achieve the strategic positioning of a high-end intelligent manufacturing and industrial internet solution service provider, Foxconn Industrial Internet still has a long way to go.