Evercore ISI reiterates TE Connectivity stock rating on AI growth

TE Connectivity reported Q2 FY2026 revenue of $4.74 billion and adjusted EPS of $2.73, slightly ahead of consensus, while sales rose 14.5% year over year with 7% organic growth. The company raised its fiscal 2026 AI revenue target to $2.35 billion-$2.4 billion from $2.2 billion and guided June-quarter revenue of $5.0 billion and EPS of $2.83, both above Street estimates. Evercore ISI reiterated an Outperform rating and $260 price target, although pre-market shares fell despite the beat.

Analysis

TEL’s print matters less as a beat-and-raise than as proof that AI/networking demand is no longer just an order-book story; it is showing up in margin mix and management willingness to reinvest. The second-order implication is that the earnings power of industrial connectivity suppliers is becoming more levered to data-center buildouts than to classic transportation cycles, which should widen the valuation gap versus slower-growth electrical/component peers over the next 2-4 quarters.

The market’s immediate risk is over-anchoring on the quarter-over-quarter softness in the higher-multiple AI bucket and missing that pipeline quality is the leading indicator, not the quarterly revenue print. If AI-related revenue continues compounding into fiscal 2026 as guided, TEL can sustain premium multiple support even with near-term margin pressure from investment spend; if not, the stock’s rerating is vulnerable because expectations have become more self-reinforcing after an 85% run.

The contrarian read is that the stock may not be “cheap” even if fair-value screens imply upside, because the market is now paying for duration in AI exposure plus defensive margin quality. The upside case is therefore not just beat-and-raise, but a continued shift in mix toward data-center and energy infrastructure, which should pull consensus EPS estimates higher over the next several months. The main reversal trigger is any sign that AI orders are being pulled forward rather than expanding structurally, which would compress the premium quickly.

Broader rate/credit conditions also matter: if industrial capex financing tightens, the Transportation weakness could stop being a one-off and become a cycle signal. That would pressure the narrative around TEL as an AI beneficiary and re-rate the name back toward a cyclical component supplier rather than an infrastructure compounder.

Key Decisions for Investors

• Long TEL on pullbacks over the next 1-2 weeks; target a 10-15% move over 3-6 months if AI revenue guidance is validated by subsequent order commentary. Risk: 8-10% drawdown if the market starts discounting the margin guide more heavily than the raised AI target.
• Pair trade: long TEL / short a slower-growing industrial-electrical peer basket (e.g., ETN or set up via sector basket if available) for 1-2 quarters. Thesis: TEL’s AI mix should support estimate revisions faster, while the short leg is more exposed to capex digestion and multiple compression.
• Buy TEL call spreads 3-6 months out to express upside with limited premium risk. Prefer strikes around 5-10% above spot to avoid overpaying for the already-rich rerating; payoff improves if consensus raises FY26 numbers again.
• Trim or avoid chasing TEL if it trades through the top end of fair-value estimates without a fresh catalyst. The stock is now vulnerable to any data-center deceleration headline, making upside asymmetry less attractive after a sharp year-long run.