Global Tech Investors Cautious of Foxconn’s Latest Results

Foxconn Technology Group just turned in a set of results that should make global technology investors cautious.

While revenue at Hon Hai Precision Industry Co., its flagship company, grew a solid 45%, that’s thanks to both a weak base last year amid the global pandemic and the delayed release of Apple Inc.’s iPhone, which it assembles. Operating income warrants concern, having missed analyst estimates. At 2.05%, operating margin wasn’t terrible, but is below the levels it had been tracking recently — a caveat being that this was the company’s traditional low season.  

Foxconn is the world’s most ubiquitous technology manufacturer. Beyond the iPhone, the Taiwanese company also supplies completed or partially assembled components for games consoles, computers, notebooks, servers, electric vehicles and communications networks. The good news is that, this quarter, the company sees overall revenue climbing from a year earlier. Yet it’s also predicting significant declines in networking and computing products. These two divisions combined accounted for around 40% of sales. This is where the broader industry should be wary.

Telecommunication equipment has the potential to be a major growth area for Foxconn, as does its computer division, which includes the kinds of servers that sit in data centers storing and delivering streaming movies, web conferences and e-commerce websites. Expansion in these areas is expected to continue, helped by the work-from-home trend that was accelerated by the pandemic. An important factor will be faster and more portable internet connections, which means 5G.

Unfortunately, the global smartphone market has been lackluster. Shipments dropped 5.9% in 2020, and are likely to climb a mere 5.5% this year, according to researcher IDC Corp. This seems surprising given that PC sales volumes rose last year and we saw huge growth in games consoles — an indication that there are plenty of consumers out there with spending money.

In reality, 5G handsets have failed to impress. Every major name has now come to market with a flagship device — Apple being one of the last to the party with its iPhone 12 unveiled in October. Yet consumers just don’t seem to care. One reason could be the limited network rollout, complicated by the specific technical vagaries of new wireless standards that require more base stations.

Eventually, customers will need to upgrade. Network operators and device makers are hoping that they’ll choose a faster, data-hungry handset. Content providers, network vendors and server makers share similar hopes because they know that more powerful smartphones lead to greater consumption of video and higher e-commerce turnover. And if that happens, Foxconn will land more orders for its servers and equipment.

Before they can enjoy the spoils, though, the tech industry is going to need you to buy a 5G phone, and quickly.

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