TE Connectivity

TE Connectivity's good fiscal third-quarter results came in above guidance, with broad-based demand across end markets and strong AI growth. Sales rose 14% year over year to $5.2 billion. Profitability also expanded, with a non-GAAP operating margin of 21.9%, up 200 basis points year over year.

Why it matters: TE is benefiting from strong demand across its served markets, led by rapidly rising AI demand that further buoys good underlying results. We see the firm as well-positioned and well-diversified, with a healthy position in power and scale-up connectivity in AI networks. Bearishness on TE's optics portfolio for AI has pressured shares, and we don't agree. We see copper and optics as complementary technologies long-term, and see a healthy growth runway for both sections of TE's data center exposure. TE doesn't need to be an optics leader to see this growth. AI is helping TE diversify. The industrial segment reached half total revenue, and we expect this to be the majority segment from here on out. We still expect automotive to be the single biggest end market for TE (37% of sales in the quarter,) but expect less concentration risk than in the past.

The bottom line: We raise our fair value estimate for narrow-moat TE to $230, from $220, behind higher medium-term AI growth assumptions. Shares fell about 8% intraday on continued pessimism around optics, and we see this as a good entry point for long-term investors. Shares are now down 15% year-to-date, which we see as an overblown reaction to optics pessimism. We focus on the growth opportunity for TE's existing portfolio, and see more than a five-year runway for good copper growth. We like TE's diversification and AI exposure. To justify our valuation, investors have to expect high-single digit growth, with 30% incremental operating margins on new revenue. The firm is achieving these targets this year, and we don't believe investors have to get overly bullish to justify upside in shares currently.

BLANK PAGETE is acquiring Astrodyne TDI for $1.4 billion in cash, which management expects to close by the end of calendar 2026. Astrodyne adds power management and industrial exposure for TE, which expands its reach in grid hardening and data centers. At annual sales of $250 million, the multiple is higher than historical deals in the components market, but we see this as a fair price considering the higher growth opportunity with AI as a driver. Overall, this acquisition doesn't materially impact TE's results, and fits with the firm's nature as a serial acquirer. We like the deal.

For more detail on our view on copper and optics as complementary technologies long-term, read our April 2026 piece, The Future of Networking is Optical, As Seen at OFC 2026.

Our fair value estimate of $230 per share implies a forward fiscal 2026 adjusted price/earnings multiple of 20 times and an enterprise value/sales multiple of 3 times. The largest drivers of our valuation are growth in transportation and AI applications, along with operating leverage driving margin expansion.

We anticipate 10% compound annual sales growth through fiscal 2030. We expect the transportation solutions segment to grow 5% over our explicit forecast, which includes our expectation for softer demand in the medium term. We expect the automotive and commercial transportation markets to experience content growth over underlying production within management’s 4%-6% target range. We see growth in transportation markets primarily from content growth, not flattish production growth, in the medium term. TE sells to every car manufacturer in the world, and we view the transition to electric vehicles with greater electrical content as a material driver of the firm’s growth.

We expect 15% growth from the industrial solutions segment through fiscal 2030, driven by investments in artificial intelligence and short-term inorganic growth from the 2025 acquisition of Richards Manufacturing. In our opinion, AI will be the primary driver of this segment going forward. From a base of $1.4 billion in AI and cloud revenue in fiscal 2025, we expect high-double-digit growth over five years, creating a multi-billion-dollar revenue stream. We expect 20% upside to management’s $3 billion target in fiscal 2027, and continued double-digit growth thereafter. As model builders and hyperspace cloud providers increase their capital expenditures to keep up with growing bandwidth demands and bigger AI models, we see an expanding market for TE’s components. Outside of AI, we see industrial demand being driven by grid modernization and more electronics content in factories, robotics, and other industrial equipment.

We expect TE’s profit margins to rise with volume growth over the medium term. We project 24% non-GAAP operating margin in fiscal 2030, up from 20% in fiscal 2025 and prior midcycle levels in the high teens. We credit rising AI volumes for a large portion of this expansion. We expect transportation segment margins to remain stable around 20%, while we forecast further expansion in industrial segment margins driven by rising data center shipments.

We assign TE Connectivity a narrow economic moat rating based on intangible assets and switching costs. These moat sources lead to excess returns on invested capital that we expect to endure, more likely than not, for the next 10 years.

We think switching costs are the primary moat source for advantaged components suppliers. Once a supplier's component is designed into an end application, it is likely to remain in for the product's entire lifecycle, ranging from one to two years in data centers, five to seven years in cars, and more than 10 years in aerospace applications. It is highly unlikely a customer would rip out and replace a component once designed in. Customer switching costs are tangible and include the time and cost of system redesign, retraining to learn and integrate the intricacies of a competitor’s proprietary technology, the lead time and expense of designing and testing the new system, the potential for disruption during production, and the purchase or relocation of heavy equipment or manufacturing.

TE designs components for mission-critical systems such as electric vehicle battery management systems, advanced driver-assistance systems, avionics systems, and power grids. These applications carry outsized costs to electrical failure, in our view. If there’s an electronic part failure in a consumer device like a smartphone or gaming console, it results in customer inconvenience and a potential loss of future sales for the original equipment manufacturer. If there’s a similar failure in a mission-critical system, the results can be catastrophic, such as driver or passenger injury (and in the worst cases, death), or widespread power outages with knock-on adverse effects. With these high costs of failure as a backdrop, OEMs for these applications are highly risk-averse and require components to work flawlessly 100% of the time, no matter the circumstances or context. As such, strong suppliers like TE Connectivity build components to withstand harsh environments like heat, cold, water, snow, ice, sand, dirt, intense vibration, electromagnetic interference, and even explosions, depending on the application. In our view, TE has earned the trust of risk-averse OEM customers across verticals with a flawless operating history, and its customers have a very high bar for switching away from a trusted incumbent supplier for mission-critical applications.

We believe an additional facet of switching costs is derived from highly integrated relationships between TE and its customers. Once TE wins a design, it takes on the role of a design partner, often moving a team of engineers onsite at a customer to build out the system in question. This adds an incumbent advantage. Both teams build relationships, share knowledge, and have experience from working on previous designs together. We contend these close relationships add a layer of stickiness to mission-critical products. We think that customers looking to build a new product iteration or model are more likely than not to choose incumbent TE and avoid the time, cost, and risk of using a new supplier.

TE also boasts strong design and engineering abilities, in our view, exhibiting intangible assets. Nearly all electronic components are custom or semicustom, with each customer using its own proprietary designs and needing specific requirements for components to fit in. TE has an expansive array of individual connectors and sensors at its disposal to design custom systems in collaboration with its customers. In cutting-edge applications like new vehicles and communications equipment, we posit that system requirements are constantly evolving, requiring new tweaks to electronic component content that incentivize custom design.

We think lower-value consumer applications are more standardized and less differentiated, whereas TE focuses on custom designs for cutting-edge applications, which create pricing power to maintain strong gross margins and fend off lower-priced competition. The company's research and development budget is focused on advancing new products that will enable new use cases for customers, like new high-voltage systems in an electric vehicle, or higher-speed data transfer in a data center or mobile network base station.

We believe TE’s technological portfolio would be difficult for a new entrant or a smaller existing competitor to replicate. Furthermore, its parts are hard to rip out once embedded with a customer, especially for mission-critical applications. This combination leads to strong returns on invested capital and our narrow economic moat rating.

We considered a wide moat rating for TE, but a rapid pace of commoditization in the components industry leads us to a narrow moat rating. In short, we believe TE uses research and development to consistently introduce new products to avoid commoditization, which occurs after each product cycle. While we have confidence in TE maintaining innovation and differentiation over the next decade, we are slightly less confident over a 20-year horizon, considering technological shifts across automotive and data center markets that will require continued investment for TE to maintain its leadership and profitability. We only allocate a wide moat rating in components to Amphenol, which earns best-in-class profitability, end-market diversification, and production efficiency, in our view.

TE is a leader in the automotive connector and sensor market, enabling OEMs to build more advanced and efficient electric and autonomous vehicles.

Its products are specialized for mission-critical applications in harsh environments, where reliable performance creates sticky customer relationships.

TE has a burgeoning opportunity in data centers and AI that is driving impressive revenue growth.

Revenue concentration in the automotive and commercial transportation markets makes TE susceptible to downturns in production, as seen in 2020.

TE relies on elevated R&D spending compared with competitors to maintain an innovation advantage. Any slowdown on its part or acceleration on the part of competitors may narrow the gap.

TE has lower and more volatile operating profit margins than primary peer Amphenol, which signals suboptimal cost management, in our view.