Flex Q3 Results Beat Guidance and Raise Outlook, But Valuation Concerns Loom

What happened

Flex reported third-quarter fiscal 2026 net sales of $7.1 billion, an 8% year-over-year increase that exceeded its previous guidance. Management raised full-year forecasts for net sales, adjusted operating margin, and adjusted earnings per share, signaling confidence in near-term momentum. This positive development contrasts with the company's history of flat to declining revenues and thin net margins around 3%, as detailed in the DeepValue master report. Despite the upbeat guidance, Flex's stock has surged approximately 65% over the past year and trades at a rich valuation—about 74% above a DCF-based intrinsic value of $36.64—raising skepticism about sustainability. The critical issue is whether this performance reflects durable improvements in free cash flow and mix shift or merely temporary cyclical tailwinds in a competitive EMS industry.

Implication

The guidance increase suggests Flex is executing well in the near term, potentially benefiting from AI data center demand and operational efficiencies. However, the EMS industry remains fiercely competitive with limited pricing power, making consistent margin expansion difficult to sustain. Given the stock's sharp re-rating and premium to intrinsic value, the risk/reward skews negative unless evidence emerges of free cash flow durability above $1 billion annually. Long-term holders must closely monitor quarterly FCF trends, balance sheet health, and any signs of margin compression or geopolitical disruptions. While the news is encouraging, it fails to provide a sufficient margin of safety to alter the cautious stance recommended in the master report.

Thesis delta

The raised guidance offers a near-term positive catalyst but does not fundamentally shift the 'POTENTIAL SELL' thesis, which hinges on overvaluation and cyclical risks. For a meaningful delta, Flex must demonstrate sustained revenue growth and free cash flow strength over multiple quarters to justify its premium multiple. Until then, the core concerns about thin margins and a lack of margin of safety remain unchanged.