Byte #69: One Hardware Stock Benefiting from AI, Defense and Industrials

Dear Readers,

Welcome to this week’s Byte. It’s slightly delayed this week, but I’ll continue to keep the Monday cadence unless otherwise noted.

Today, I want to talk about a company that I have mentioned several times in previous Bytes when discussing AI infrastructure and electrification, but I haven’t really gone into the weeds on the business itself.

That company is Amphenol (APH).

Amphenol is a nearly 100-year-old company that became publicly traded in 1991. It is a global leader in connectors, sensors and antennas, with products that sit behind many of the technologies we rely on every day.

What makes Amphenol particularly interesting to me today is its exposure to three powerful secular trends: AI infrastructure, defense and industrial electrification.

The company is a leader across copper and fiber connectivity for AI infrastructure and has increasingly become a "default connectivity partner" for customers deciding between copper and fiber solutions. At the same time, it serves a broad range of defense, aerospace, automotive, industrial and communications markets.

By now, you probably know me well enough to know that I’m always looking for quality compounders that have the potential to become multi-baggers over time.

Amphenol is one company that I believe deserves a closer look.

So, What Does Amphenol Actually Do?

At its core, Amphenol is a global supplier of high-technology connectors, sensors and antennas.

Think of its products as the pieces that allow power, data and signals to move reliably between different components of a system.

The company operates across eight major end markets:

• Automotive

• Broadband

• Commercial Aerospace

• Defense

• Industrials

• IT Datacom

• Mobile Devices

• Mobile Networks

Its products are often used in environments where reliability matters. They need to withstand conditions such as heat, cold, water, snow, ice, sand, dirt and intense vibration.

That creates an important characteristic of the business: these aren't necessarily products customers want to experiment with or replace frequently.

Amphenol also has a broad global footprint, operating across approximately 40 countries and serving a large and diversified customer base.

A Diversified Business

One thing I like about Amphenol is that, despite its significant AI exposure, it isn't simply an "AI stock."

Its revenue is spread across multiple markets.

By end market, approximately:

• IT Datacom: 36%

• Industrial: 19%

• Automotive: 15%

• Communication Networks: 10%

• Defense: 9%

• Mobile Devices: 6%

• Commercial Aerospace: 5%

Geographically, revenue is also well diversified:

• North America: 41%

• Asia: 42%

• Europe: 15%

• Rest of World: 2%

This diversification matters because it means Amphenol has multiple avenues for growth rather than relying entirely on one customer, one geography or one end market.

Why AI Is Such a Big Opportunity for Amphenol

This is where the story gets particularly interesting.

The global buildout of AI infrastructure requires enormous amounts of data transmission and power distribution.

The more powerful AI systems become, the more data needs to move between GPUs, servers, storage systems and networking equipment. That requires increasingly sophisticated connectivity solutions.

And this is where Amphenol comes in.

The company provides a broad range of high-performance connectivity products, including:

high-speed copper, fiber-optic and extreme-power interconnect solutions.

In other words, Amphenol is one of the companies selling the "picks and shovels" behind the AI infrastructure buildout.

According to the company's 2025 financial report, its IT Datacom business has become a major growth engine, with sales increasing sharply as AI-driven data-center deployment accelerates.

Amphenol has also been expanding its capabilities through acquisitions. Its acquisition of CommScope's Connectivity and Cable Solutions business, for example, added fiber-optic and copper cable systems, connectors and structured cabling capabilities serving enterprise networks, broadband providers and data centers.

This is important because Amphenol isn't simply benefiting from AI through one product.

It is expanding the breadth of its connectivity offering across the data-center ecosystem.

What Moats Does Amphenol Have?

When I evaluate a company, I don't just want to know whether revenue is growing.

I want to understand why the company can continue to grow and what protects that growth from competitors.

For Amphenol, two important advantages stand out.

1. Cost Advantage

Amphenol operates with a highly decentralized organizational structure, with more than 125 general managers operating with significant autonomy.

This structure allows individual businesses to make decisions quickly while maintaining a strong focus on operational efficiency and cost control.

That decentralized model has helped Amphenol consistently generate strong margins while continuing to grow through both organic expansion and acquisitions.

2. Switching Costs and Customer Relationships

Amphenol also benefits from sticky customer relationships.

Many of its products are customized for mission-critical applications and operate in demanding environments.

If a connector or sensor is being used in a defense system, aircraft, vehicle or industrial application, reliability matters.

Customers aren't necessarily looking for the cheapest component. They are looking for something that works consistently and meets demanding specifications.

Once a supplier has been designed into a product or system and has established a track record of reliability, switching suppliers can involve qualification, testing, redesign and operational risk.

That creates a meaningful barrier to switching.

Now Let's Look at the Numbers

This is where Amphenol starts to look like the type of business I typically look for.

Over the last five years:

• Sales have grown approximately 18.5% annually

• EPS has grown approximately 24.4% annually

• Pretax margins have averaged around 20%, increasing to more than 24% in 2025

• ROE reached approximately 32.7% in 2025, versus an average of 26.8% over the past five years

The balance sheet is something I pay close attention to.

Amphenol's debt is approximately 4x free cash flow, which is higher than I would ideally like, but still below my personal threshold of 5x.

Margins are also strong for a company operating in this industry, with approximately:

• 39% gross margin

• 28% operating margin

• 18% net profit margin

These numbers tell me something important.

This isn't simply a company benefiting from a hot AI cycle.

There is a financially strong underlying business generating attractive returns.

And Then Came the Latest Quarter

In its most recent second quarter of fiscal 2026, Amphenol reported $8.76 billion in revenue, representing a 55% increase year over year.

EPS increased to $2.00, up approximately 59% year over year.

Those are exceptional growth numbers.

But what I find even more interesting is what is happening underneath the headline revenue growth.

Amphenol booked a record $10.7 billion in orders during the quarter, resulting in a book-to-bill ratio of 1.23.

A book-to-bill ratio above 1 means orders are coming in faster than revenue is being recognized, which can provide visibility into future demand.

Even more importantly, the company reported positive book-to-bill across every end market during the quarter.

That matters.

It suggests the growth isn't coming solely from one narrow AI opportunity.

The company's orders increased approximately 94% compared with the prior year, providing substantial visibility into future demand.

Amphenol also generated approximately $1.6 billion of operating cash flow during the quarter, giving management significant financial flexibility to continue investing in capacity, acquisitions and shareholder returns.

Forecast and Valuation

Now, let’s look at what the numbers could tell us about the stock’s potential from here.

A great business can still be a bad investment if you pay too much for it.

Amphenol has increased its EPS growth rate from approximately 18.5% over the past 10 years to 24.4% over the past five years.

The company has also demonstrated strong capital allocation through a combination of organic investment, acquisitions and shareholder returns.

Analysts are currently expecting revenue and earnings growth of approximately 25% annually over the next five years.

I am going to be slightly more conservative and use 20% annual EPS growth for my own scenario.

Using that assumption, EPS could reach approximately $4.98 in five years.

If the market were willing to assign a P/E multiple of 35 to those earnings, that would imply a potential share price of approximately $174.

At the current price of approximately $84, that represents roughly a 2.1x increase in the share price.

Of course, this is not a prediction.

It is simply a valuation exercise based on a set of assumptions.

The stock has traded between approximately $59 and $89 over the past 52 weeks.

If I use the 52-week low of $59 as a downside reference point, my upside-to-downside calculation would be:

($174 - $84) / ($84 - $59) = approximately 3.6 : 1

Again, this calculation is only as good as the assumptions behind it.

And that brings me to the biggest issue with Amphenol today.

Valuation.

The stock is currently trading at a P/E of approximately 42x, which is a premium valuation.

The market is already recognizing the quality and growth potential of the business.

That means the company doesn't necessarily have to disappoint for the stock price to decline. If growth expectations moderate or the valuation multiple contracts, the stock could experience a meaningful pullback.

What Could Go Wrong?

Like every investment, Amphenol comes with risks.

Premium valuation: The biggest risk, in my view, is simply paying too much for a great business. A high-growth company can still produce disappointing investment returns if the starting valuation is too high.

AI spending slowdown: A meaningful slowdown in AI infrastructure spending could reduce demand for data-center connectivity products and impact Amphenol's growth rate.

Geopolitical risk: Amphenol operates across approximately 40 countries, with significant exposure to both North America and Asia. Changes in trade policy, tariffs, supply chains or geopolitical tensions, particularly involving China, could affect the business.

Cyclical end markets: Several of Amphenol's markets, including automotive, industrial and aerospace, are economically sensitive. A broader industrial slowdown could affect demand.

My Investment Thesis

So, why does Amphenol interest me?

Because this is more than just an AI story.

It is a high-quality connectivity business benefiting from several long-term growth trends at the same time.

AI infrastructure is driving demand for high-speed connectivity.

Defense requires increasingly sophisticated electronic systems.

Industrial applications are becoming more electrified and connected.

And Amphenol continues to expand its capabilities through innovation and acquisitions.

At the same time, the company has demonstrated strong revenue growth, attractive margins, high returns on capital and a long history of disciplined execution.

The question isn't whether Amphenol is a good business.

For me, the more important question is:

What price am I willing to pay for this business and its future growth?

At today's valuation, that question becomes especially important.

And that is often where the difference between a great company and a great investment opportunity begins.

With that, I’ll rest my case. I hope this Byte has given you a better understanding of Amphenol and, more importantly, how I think about a company while investing.

As always, the thoughts shared in this Byte are meant to help you think more clearly about investing, not to tell you what to buy or sell. Every investor's situation is unique, so please do your own due diligence before making any investment decisions.

And I shall see you next Monday.

Until then…

Invest Smart with Pooja :)