Flex's CPI Spin-Off Splits 65% Growth Business From Cash-Focused Core

Flex's planned CPI spin-off would split a 65%-growth AI infrastructure business from a cash-focused manufacturing core.

Flex Ltd. plans to spin off its Cloud and Power Infrastructure business into a standalone company, separating a segment that grew 35 percent year over year to $2.2 billion in fiscal Q1 from a diversified manufacturing operation focused on cash generation.

"SpinCo is not a data center components company. It is a digital and electrical infrastructure company built to help customers solve the power, cooling and scaling challenges that come with AI," Revathi Advaithi, chief executive officer at Flex, said on the company's earnings call.

CPI represented 24 percent of Flex's fiscal 2026 revenues. Management expects CPI revenues to increase 65-75 percent in fiscal 2027, with power growing faster than cloud. The remaining Flex business posted $7.9 billion in Q1 revenue, up 21 percent year over year, with adjusted operating margin of 6.7 percent, up 70 basis points. Adjusted EPS rose 39 percent to $1.00.

The tax-free separation, targeted for completion in the first quarter of calendar 2027, would give investors a pure-play AI infrastructure company while the remaining Flex focuses on portfolio optimization and cash generation. Flex revised its fiscal 2027 free cash flow conversion to approximately 40 percent from 60 percent to account for spin-off costs, which totaled $24 million in Q1 alone.

The planned company is designed around power, compute and thermal management, with integrated infrastructure spanning critical and embedded power, liquid cooling and compute integration. Flex expects the business to pursue faster-growth opportunities tied to AI data-center and electrical infrastructure spending. The company is expanding its partnership with Cerebras to scale manufacturing of the CS-3 AI accelerator system in the United States and launched new liquid cooling solutions through its JetCool acquisition.

The remaining Flex operation will keep advanced manufacturing exposure across diversified markets, with portfolio optimization and cash generation taking greater priority. Jabil Inc., an electronics manufacturing peer, recently said AI infrastructure demand remained extremely strong and raised its full-year AI-related revenue outlook. Celestica Inc. also raised its 2026 outlook and expects growth to accelerate in 2027 on very strong customer demand.

Two Companies, Two Capital Allocation Frameworks

Advaithi said the spin allows each company to sharpen its strategic focus and align capital allocation with growth priorities. "SpinCo requires a capital allocation framework designed for rapid growth as demand for AI infrastructure accelerates," she said. "Many people still think about AI as a compute story. I think it is increasingly becoming an infrastructure story and more specifically a power story."

Flex expects fiscal 2027 revenue of $33.7 billion to $35.2 billion, up 23 percent at the midpoint, with adjusted EPS of $4.42 to $4.74, up 39 percent. Capital expenditures are guided at $1.5 billion to $1.6 billion, focused on facility and infrastructure investments for the CPI segment. The company expects at least 100 basis points of year-over-year margin improvement in CPI, though the segment's growth is back-half loaded.

Margin Pressure and Execution Risks

Flex is grappling with margin pressure as it invests heavily to support expected growth. New programs in the CPI business initially require investment, which can temporarily weigh on margins, while the power business is seeing muted margins as Flex continues investing to support growth of more than 70 percent. The company faces capacity constraints in some modular power areas and continues to commission new facilities.

The stock trades at a forward 12-month price-to-sales ratio of 1.21, below the industry average of 10.93. Flex carries a Zacks Rank #3 (Hold), with a Value Score of B, VGM Score of B and Momentum Score of A. The stock has surged 143.6 percent over the past year but declined 13.7 percent over the past three months against the industry's 6.2 percent gain.

Flex will provide additional details on the path forward for both companies at its Investor Day on November 10.

This article is for informational purposes only and does not constitute investment advice.