Morgan Stanley has lifted its price target on TD Synnex from $334 to $359 while maintaining an Overweight rating, and has named the company its most preferred pick within its enterprise hardware coverage universe.

The revision is primarily based on the company's significantly better-than-expected third-quarter results, further accelerating growth, and continued improvement in operating leverage. TD Synnex's fiscal third-quarter revenue and earnings per share came in 13% to 21% above consensus expectations, while its fiscal fourth-quarter guidance exceeded market forecasts by 12% to 25%.

On this basis, Morgan Stanley raised its earnings estimates for fiscal 2027 and fiscal 2028 by 12% to 15%, reasoning that stronger revenue growth and improved expense efficiency will continue to drive profit performance.

Enterprise AI Demand Becomes the Core Growth Driver

Morgan Stanley believes enterprise AI demand is shifting from the experimentation phase to production deployment, a transition that is directly fueling demand for computing, storage, networking, and security equipment, and driving faster growth in TD Synnex's Distribution business. In the fiscal third quarter, total billings for the Distribution business rose 27% year over year.

At the same time, total billings at Hyve Solutions, the company's data center infrastructure unit, surged 117% year over year, making it one of the company's fastest-growing segments. Morgan Stanley expects that as enterprises continue to expand their AI infrastructure spending, the Distribution business will remain a beneficiary, while Hyve is expected to sustain rapid growth through newly secured hyperscale cloud customer projects.

Gross Margins Under Pressure, but Operating Leverage Improvement Is More Pronounced

The rapid growth in AI infrastructure demand has also brought some margin pressure. Gross margins in TD Synnex's Advanced Solutions business declined, mainly because large infrastructure and AI projects account for a larger share of the revenue mix, and such projects inherently carry relatively lower gross margins.

However, Morgan Stanley views this margin pressure as largely a result of business mix changes and believes it does not alter the broader trend of improving earnings quality. In the fiscal third quarter, operating expenses as a percentage of revenue fell to 3.63%, the lowest level in more than five years.

In other words, although newly added AI and infrastructure projects carry lower gross margins, accelerating revenue growth and a declining expense ratio are unlocking more pronounced operating leverage, thereby supporting overall profitability.

Free Cash Flow Expected to Improve After Hyve Investment Peak

Cash flow is another key factor behind Morgan Stanley's upward revision. Previously, to support new customer projects at Hyve, TD Synnex made sizable working capital and business investments that weighed on free cash flow.

Morgan Stanley expects that as these related investments gradually taper off, the company's free cash flow will turn positive in the fiscal fourth quarter and improve further in fiscal 2027.

Overall, Morgan Stanley believes TD Synnex currently benefits from three supporting factors: enterprise AI demand driving accelerating revenue growth, improving operating leverage from a declining expense ratio, and recovering free cash flow after the peak of Hyve investments. Based on these factors, the firm raised its price target to $359 and continues to maintain its Overweight rating.