Executive Summary / Key Takeaways

• AI-Driven Data Center Dominance: Advanced Energy is experiencing unprecedented growth in its Data Center Computing segment, with revenue more than doubling year-over-year in Q3 2025 and projected to grow 25-30% in 2026, driven by increasing AI investments and the company's high-efficiency, high-power density solutions. This segment is becoming a significant revenue driver, compensating for cyclical softness in other markets.
• Technological Edge in Semiconductors: The company's next-generation plasma power products (eVoS, eVerest, NavX) are gaining strong traction in leading-edge logic and memory processes, poised to drive substantial market share gains and outgrow the overall semiconductor equipment market in 2025 and beyond.
• Operational Efficiency and Margin Expansion: Strategic factory consolidation, including the closure of its China manufacturing facility, and ongoing cost reduction programs are significantly improving gross margins, with the company targeting 40% exiting 2025 despite tariff headwinds.
• Strategic Diversification Mitigates Risk: Advanced Energy's focus on three distinct, high-growth markets (Semiconductor, Data Center, Industrial & Medical) with different cycles provides financial stability and allows for continuous investment in R&D and capacity.
• Robust Liquidity and Growth Investments: A strong balance sheet with $758.6 million in cash and $600 million available credit supports increased capital expenditures for data center capacity and the new Thailand factory, alongside opportunistic share repurchases and a pipeline for strategic M&A in the Industrial & Medical sector.

Setting the Scene: Precision Powering Global Innovation

Advanced Energy Industries, Inc. ($AEIS) stands as a critical enabler of high-tech industries, providing highly engineered, precision power conversion, measurement, and control solutions globally. Incorporated in 1981, the company's foundational strength lies in transforming raw electrical power into highly controllable, usable energy tailored for complex equipment. This core capability positions Advanced Energy at the heart of several rapidly evolving sectors, including semiconductor manufacturing, industrial and medical applications, and the burgeoning data center computing market.

The industry landscape is currently shaped by several powerful megatrends. Artificial intelligence (AI) is driving unprecedented demand for advanced computing infrastructure, which in turn necessitates increasingly sophisticated power solutions. Energy efficiency, automobile electrification, and the Internet of Things (IoT) further underscore the need for Advanced Energy's specialized products. The company's overarching strategy is built on market diversification, leveraging its industry-leading power technologies across these high-end markets to generate more consistent profits and cash flow. This approach is designed to mitigate cyclical risks, as these markets do not typically move in sync, ensuring that at least one segment is likely to be strong at any given time.

Competitive Landscape and Strategic Positioning

Advanced Energy operates within a competitive arena, facing both direct and indirect rivals. Key direct competitors include MKS Instruments (MKSI), Applied Materials (AMAT), Lam Research (LRCX), and Analog Devices (ADI), all vying for market share in semiconductor and industrial power applications. Advanced Energy differentiates itself through its specialized focus on precision power conversion and RF solutions, often offering greater efficiency and reliability in demanding environments compared to more generalized offerings. For instance, in plasma power and high-voltage systems, Advanced Energy's products are positioned as more specialized for complex industrial and semiconductor processes, potentially delivering superior performance in thermal instrumentation and power control.

While larger players like Applied Materials and Lam Research boast broader ecosystems of integrated tools and dominant scale in semiconductor equipment, Advanced Energy's agility in custom applications allows it to address niche markets more quickly. The company's modular architecture, for example, has compressed development cycles for new derivative products from approximately 18 months to less than four months, enabling faster delivery of customized solutions. This technological adaptability provides a distinct edge, particularly when engaging with hyperscale customers requiring rapid innovation.

Financially, Advanced Energy's revenue growth and profitability margins are solid, though they may trail the sheer scale and diversified revenue streams of market leaders like Applied Materials. However, Advanced Energy's focus on high-value products for a limited set of customers in the data center market, for example, has resulted in gross margins that are just under the corporate average but significantly improved from historical levels. This selective engagement strategy aims to maximize share in profitable programs rather than pursuing market share at all costs.

Indirect competition arises from alternative power management solutions, such as software-based systems or emerging renewable energy storage technologies, which could reduce demand for traditional hardware. However, high R&D requirements, stringent regulatory approvals, and established customer relationships in Advanced Energy's core industries act as significant barriers to entry, helping to protect its market position. The company's extensive global distribution network further strengthens its reach and customer support, fostering recurring revenue and capital efficiency.

Technological Differentiation and Innovation: Powering the Future

Advanced Energy's core competitive advantage is deeply rooted in its highly differentiated technology, which is critical for the precision power conversion, measurement, and control solutions it provides. The company's products are designed to transform, refine, and modify raw electrical power into highly controllable, predictable, and customizable forms, enabling customers to optimize energy consumption through increased power conversion efficiency, power density, and process control.

A prime example of this technological leadership is seen in its plasma power products for the semiconductor market, including the eVoS, eVerest, and NavX platforms. These solutions are crucial for advanced plasma-based etch and deposition processes, which are fundamental to manufacturing leading-edge logic and memory devices. The tangible benefits of these technologies include enhanced yield and throughput, which are critical performance metrics for semiconductor fabs. Management has stated that these products allow customers to "increase their etch rate and to lower the defect rate as they implement these new leading-edge processes." The company has shipped over 350 qualification units of these next-generation products through Q1 2025, a fivefold increase from a year prior, indicating strong customer validation and adoption.

In the data center computing market, Advanced Energy's high-efficiency, high-power density products are proving ideal for AI applications. The company has leveraged its expertise in liquid cooling, a technology perfected for plasma power, to gain an advantage in the data center market, which is expected to shift towards liquid-cooled solutions as power levels continue to increase. The content per AI data center for Advanced Energy is significantly higher, typically 5 to 10 times the power consumption of a non-AI data center, translating into higher average selling prices (ASPs) for each successive generation of power solutions.

Advanced Energy's commitment to R&D is evident in its continuous innovation. The company has accelerated its technology roadmap in data centers, developing next-generation power solutions, including more efficient high-voltage DC power architectures like 800-volt solutions. These advanced designs are expected to ramp to volume in 2027 and 2028. Furthermore, the acquisition of Airity Technologies, Inc. in June 2024 brought critical GaN-based high-voltage power technology, which has already been integrated into flagship products, enhancing the company's technological capabilities. The launch of Evolve, a matchless RF delivery system based on the eVerest modular architecture, further demonstrates the company's ability to deliver innovative solutions with features like millisecond tuning, multilevel pulsing, and a small footprint.

For investors, this technological differentiation is paramount. It forms a strong competitive moat, allowing Advanced Energy to command higher ASPs, improve gross margins, and secure a leading market position in critical applications. The ability to quickly develop custom products using modular technology blocks and to adapt to increasing power requirements in AI-driven data centers directly contributes to its long-term growth strategy and market share gains.

Financial Performance and Operational Momentum

Advanced Energy's financial performance in 2025 has demonstrated robust growth and expanding profitability, underscoring the effectiveness of its strategic initiatives. In the third quarter of 2025, the company reported total revenue of $463.3 million, a significant 24% increase year-over-year, marking its fourth consecutive quarter of year-over-year growth. This strong top-line performance translated into impressive bottom-line results, with diluted earnings per share (EPS) from continuing operations reaching $1.21, compared to $0.38 in the prior-year period.

Gross profit for Q3 2025 stood at $174.4 million, yielding a gross margin of 37.6%. This represents a notable improvement of 100 basis points sequentially and 280 basis points year-over-year, driven by earlier-than-expected benefits from the China factory closure, better factory loading, and lower near-term tariff costs. Manufacturing cost reduction programs alone positively impacted gross margin by 160 basis points during the quarter. Operating income surged to $49.2 million, with an operating margin of 10.6%, the highest since 2022. Operating expenses remained well-managed at $125.2 million, decreasing as a percentage of revenue by 360 basis points year-over-year, showcasing the inherent leverage in the company's business model.

Segment Contributions:

• Data Center Computing emerged as the standout performer, with revenue more than doubling year-over-year to $171.6 million in Q3 2025. This phenomenal growth, up 112.9% from Q3 2024, was fueled by increased AI investments from hyperscale customers and the adoption of Advanced Energy's next-generation high-power solutions.
• Semiconductor Equipment revenue was relatively flat year-over-year in Q3 2025 at $196.6 million, but for the nine months ended September 30, 2025, it grew 11.1% to $628.3 million, primarily due to increased demand for platforms used in leading-edge process tools.
• Industrial and Medical revenue experienced a 7.4% decline year-over-year in Q3 2025 to $71.2 million, mainly due to customer inventory rebalancing. However, the market showed signs of sequential recovery, with management noting six consecutive quarters of decreasing inventories in the distribution channel.
• Telecom and Networking revenue increased 24.5% year-over-year to $23.9 million in Q3 2025, driven by telecom design wins and AI-related programs.

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Liquidity and Capital Resources:
Advanced Energy maintains a robust financial position, with cash and cash equivalents totaling $758.6 million as of September 30, 2025.

The company generated $154.6 million in cash flow from continuing operations during the first nine months of 2025, a substantial $104.2 million increase over the prior year, primarily driven by higher net income. This strong cash generation supports ongoing operations, increased capital expenditures of $69.9 million for manufacturing capacity, and strategic investments. The company also has $600 million available under its Revolving Facility, providing ample liquidity. Share repurchases amounted to $23.7 million in the nine months ended September 30, 2025, with $173.4 million remaining authorized. Quarterly cash dividends of $0.10 per share were paid, totaling $11.6 million.

Strategic Initiatives and Forward Outlook

Advanced Energy's strategic roadmap is designed to capitalize on its technological leadership and operational efficiencies to drive sustained growth and margin expansion. A cornerstone of this strategy is the ongoing manufacturing footprint optimization. The closure of the Zhongshan, China manufacturing facility in Q2 2025, a multi-year effort, is expected to yield significant cost savings and contribute to gross margin improvement in the second half of 2025. Further, the new flagship factory in Thailand, where ground was broken in 2023, is fully facilitized and ready to commence production within months of a go signal, capable of delivering over $1 billion in incremental yearly revenue. This facility is intended to support new customer ramps, with prequalification work potentially beginning in the second half of 2026 and full ramp-up in the latter part of 2027.

For the fourth quarter of 2025, Advanced Energy projects total revenue to increase sequentially to approximately $470 million, plus or minus $20 million. Non-GAAP earnings per share are expected to be $1.75, plus or minus $0.25. Gross margin is guided to be between 39% and 40%, with cost optimization benefits partially offset by increased tariff costs. Management remains confident that, excluding the impact of tariffs, Q4 gross margins would be 40% or greater, and they aim to reach their initial goal of 40% in the near term despite tariff impacts and a higher data center mix. Operating expenses are expected to increase to approximately $107 million due to R&D program-related costs and higher variable costs, but the company's long-term goal is to grow OpEx no more than 50% of revenue growth.

Looking into 2026, Advanced Energy is well-positioned for continued growth across its targeted markets. Data Center Computing revenue is projected to grow 25% to 30%, driven by next-generation designs secured in 2025 that are set to ramp in early 2026. In the Semiconductor market, new products and leading-edge investments are expected to drive growth as the market accelerates in the second half of 2026. The Industrial and Medical market is anticipated to benefit from a growing design win pipeline and ongoing market recovery, leading to sequential growth each quarter. Overall, the company now expects 2025 revenue to grow approximately 20%, with data center revenue more than doubling.

Risks and Challenges

Despite a compelling growth narrative, Advanced Energy faces several risks. Global economic conditions, including tariffs, export regulations, geopolitical conflicts, and inflation, introduce volatility and uncertainty. The company acknowledges that the dynamic tariff environment requires ongoing mitigation actions, and while it believes it is "relatively well positioned" due to its diversified manufacturing footprint and USMCA-compliant products, tariffs are expected to increase in Q4 2025, impacting gross margins by approximately 100 basis points.

The Industrial and Medical market's recovery pace could be tempered by macroeconomic uncertainty and tariff costs, despite signs of inventory normalization. Furthermore, while Advanced Energy actively pursues strategic acquisitions, particularly in the fragmented I&M market to build critical mass, a "continuing evaluation gap" between the company's and targets' valuations presents a hurdle. Changes in tax laws, such as the Pillar II minimum global effective tax rate regime, could also materially impact cash tax expense and the effective tax rate.

Conclusion

Advanced Energy Industries, Inc. is demonstrating a powerful transformation, leveraging its deep technological expertise and strategic market diversification to capitalize on the explosive growth in AI-driven data centers and the ongoing evolution of semiconductor manufacturing. The company's commitment to innovation, exemplified by its eVoS, eVerest, and high-voltage DC power solutions, is translating into significant design wins and market share gains, particularly in leading-edge applications. Coupled with disciplined operational execution, including factory consolidation and cost optimization, Advanced Energy is successfully expanding its gross margins and generating robust cash flow.

While macroeconomic uncertainties and the dynamic tariff environment present headwinds, Advanced Energy's proactive mitigation strategies and strong balance sheet provide resilience. The company's clear guidance for continued revenue growth, margin expansion, and strategic investments in capacity and M&A underscores a compelling investment thesis. For discerning investors, Advanced Energy represents an opportunity to participate in the foundational technologies powering the next wave of global innovation, driven by a company with a proven ability to execute and adapt in a complex, high-stakes environment.