Fabrinet (NYSE:FN) is a lesser-known winner of the artificial intelligence (AI) revolution. The stock is up a phenomenal 113% over 12 months and 475% over five years. That’s not quite Nvidia’s (NASDAQ:NVDA) pace of growth, but it remains impressive. While I accept that the current forward price-to-earnings (P/E) ratio of 28.7x may deter some investors, I remain bullish on Fabrinet, given its strong balance sheet, the expected growth of the data center/AI segment, and its strategic partnership with Nvidia. I don’t believe the stock is overvalued.
What Is Fabrinet?
Nowadays, pretty much all data, for cable TV, internet, and other forms of communications, travels at light speed along cables. Fabrinet is a company that manufactures advanced optical components, including sensors, transmitters, receivers, and lasers, essential for this high-speed data transmission.
These components are used across many industries, from the automotive sector to medical devices. However, their application for data centers has really caught people’s eyes over the past 18 months. As the demand for AI technologies grows, so does the need for efficient, high-bandwidth interconnects. Fabrinet’s active optical cables (AOCs) and other fiber optics ensure seamless, low-latency data transmission crucial for AI operations.
AI and data centers are major tailwinds for the company. The company’s datacom segment has experienced considerable growth over the past two years. Datacom revenue has grown from $81.7 million in Q3 2022 to $305.5 million in Q3 2024. This has had a profound impact on the company’s revenue breakdown, with 52% of optical communications income coming from the datacom segment. In Q2 2022, this figure was just 22%.
Looking forward, management said in the Q3-2024 earnings call that it expects Datacom revenue to be “slightly up sequentially in the fourth quarter.” This conservative forecast may disappoint some investors, but management said continuing demand for 800G products would offset the end of 100G legacy programs.
However, Managing Director, Seamus Grady, suggested that the company was very optimistic about the future and strength of its datacom business. He noted that the next generation of products — 1.6T — would complement existing 800G programs and would positively impact business performance.
Fabrinet’s Partnership with Nvidia
Fabrinet benefits from a strategic partnership with AI kingpin Nvidia. Interestingly, both companies are based in the tech hub of Santa Clara, California. Fabrinet provides Nvidia with optical-based connections, networking cables, and related services, including very short-reach AOCs with 800G transceivers. Nvidia has grown to become Fabrinet’s third-largest customer, and this relationship will likely expand further as the AI revolution scales.
This partnership with the leading enabler of the AI revolution is undoubtedly beneficial for the company’s operational foresight and order book. In an industry that is rapidly evolving, and with Nvidia operating on a one-year innovation cycle, it’s essential that component manufacturers are embedded within the development curve.
Grady added that Nvidia’s latest architecture meant that 800G products would not be cannibalized by 1.6T products. “Normally… when a new technology comes along, it tends to cannibalize the old technology. But certainly, as we go to higher speeds, 1.6T and beyond, it doesn’t seem like the 800G is going anywhere, is going to decline,” Grady noted. This potentially relieves pressure on Fabrinet to wrap up the still-young 800G products in favor of 1.6T products.
Does Fabrinet Stock Present Good Value?
At 28.7x forward non-GAAP earnings, Fabrinet doesn’t scream “value,” but it equally doesn’t appear overly expensive for its sector. It’s currently trading at a 17.3% premium to the information technology sector. While none of us want to hear the word “premium,” we shouldn’t be alarmed to see a company with AI exposure trading at higher multiples than the rest of the sector.
Given the company’s strong growth trajectory, the forward earnings multiple is expected to fall as we move forward. Its P/E ratio is forecast to fall to 25.6x in 2025 and 22x in 2026. Personally, I find those figures reassuring, and I’d expect this positive momentum to continue as AI is scaled throughout the decade.
On another positive note, Fabrinet has beaten earnings expectations in each of the past eight quarters. This is certainly an impressive track record, although it does suggest that an earnings miss would have a particularly negative impact on sentiment. It also has a strong balance sheet with cash and short-term investments of $794 million.
Is Fabrinet Stock a Buy, According to Analysts?
On TipRanks, FN comes in as a Moderate Buy based on three Buys, two Holds, and no Sell ratings assigned by analysts in the past three months. The average Fabrinet stock price target is $220.20, implying 8.6% downside potential.
The Bottom Line on Fabrinet Stock
Fabrinet stock has seen such impressive share price growth in recent months, and it appears that analysts may be struggling to keep up. This is often the case in fast-moving industries and where stocks have beaten earnings estimates. As such, analysts’ share price targets can often appear conservative even when the overarching rating is positive.
However, personally, I see Fabrinet as another critical enabler for the AI revolution. My take on the sector as a whole is bullish, and at 28.7x forward earnings, I believe Fabrinet remains an attractive investment opportunity.
