Fabrinet Rally Shows Power of AI Growth Hype and NVIDIA's Coattails
With fresh revenue growth expected and the promising AI landscape, FN stock isn't just in the spotlight – it might well be the star of the show
2023-08-24 06:51
US
Fabrinet (US:FN) shares soared in an impressive 40% rally, following the company's fourth quarter results released earlier this week, beating expectations on remarkable AI-driven datacom growth.
In its Q4 report, Fabrinet disclosed revenue of $655.9 million, surpassing the upper range of guidance, reflecting 12.9% year-on-year growth. These numbers decidedly eclipsed expectations and relieved investors who had fretted over weak potential Optical Telecom revenues that declined 17% year-on-year, attributed to high customer inventory levels.
However, the decline in Telecom was offset by the overwhelming strength in Datacom revenue, which doubled y/y to a staggering $192.5 million. This surge in Datacom is significantly powered by 800G AI modules, with NVIDIA (US:NVDA) emerging as a pivotal client.
With NVIDIA accounting for 13% of Fabrinet's revenues in FY23, it’s anticipated to remain a top-tier customer in FY24.
Key Partnerships
The relationship with NVIDIA adds another feather in Fabrinet's cap, which already includes partnerships with prominent optical telecom systems and component customers such as Cisco (US:CSCO), Lumentum (US:LITE) and Infinera (US:INFN).
Despite the upbeat Q4 results, the road ahead might still be a bit challenging for Fabrinet. The Telecom sector, traditionally the company's most significant segment, faces headwinds. Yet, FN's optimistic outlook, guided $650 million to $670 million for Q1, shows confidence with marginal quarter on quarter sales growth at the midpoint of the guide.
The company is banking on its emerging AI offerings and is in the "very, very much in the early days" of its AI engagement.
Management Performance Analysis
Fintel’s analysis of management effectiveness uses several traditional performance measures such as return on assets (ROA), return on equity (ROE) and return on invested capital (ROIC) to track true performance.
The operating cash return on investor capital (OCROIC) measures how much cash the company generates from its invested capital.
The improvement in Fabrinet’s OCROIC indicates that the company is utilizing its resources more efficiently, which is a good sign for long-term investors. The OCROIC as shown in the chart and table below has risen to its best level in two years currently at a ratio of 0.12.
The chart below shows how these performance measures have tracked over time. While the cash return on invested capital continues to lag, the operating cash variant of this return shows that true quarter by quarter underlying performance remains robust.
AI has indeed revolutionized Fabrinet's datacom vertical. From almost negligible revenues 15 months ago, AI-related products have soared to a range of $100-$140 million in the recent June quarter alone. This expansion is indicative of the company's aggressive positioning in AI, with NVIDIA spotlighted as a major customer, contributing around $344 million or ~13% to FN's revenue in FY23.
Looking forward, the trajectory for Fabrinet is not just promising, but potentially game-changing. The integration of optics with ASICs (Application Specific Integrated Circuits) is on the horizon, referred to as "Co-Packaged Optics".
This integration will dramatically amplify the value of Fabrinet's optical skills, positioning it as a formidable contender in the EMS (Electronics Manufacturing Services) space. This new avenue, coupled with Fabrinet's growth in systems, could supercharge its growth rate, further enhancing revenue and EPS.
For investors, this might be the golden hour. Fabrinet has not just displayed its capabilities in embracing the AI revolution but has also substantiated its competence in effectively navigating the turbulent waters of the telecommunications domain. The company’s track record, combined with its future prospects, paints a picture of a stock that's not just resilient, but also full of potential.
Forward Expectations
Fintel’s consensus target price of $138.31 per share for FN stock suggests the average valuation for the company pre-result was below the current trading price.
At the current share price the average consensus target suggests the stock could fall 10% over the next year, however we expect this target price will drift higher in the coming weeks as analysts upgrade target prices with the increased expectations for the year ahead.
Forward revenue estimate forecasts compiled by Fintel are shown in the table below:
In sum, with the re-acceleration of revenue growth expected in 2HFY23, coupled with the promising landscape of AI, Fabrinet’s stock isn't just in the spotlight – it might well be the star of the show.
But with its share price and valuation growing above its earnings, the stock is beginning to look expensive on several metrics. Fintel’s quantitative analysis on FN stock below shows how the stock stacks up compared to a large range of peers.
- With a Quality score of 73.45, Fabrinet lands in the upper quartile, illustrating that the company has commendable cash-generating efficiencies.
- In terms of value, the score of 61.60 positions it at 10481 out of 26783, suggesting it is moderately valued in comparison to its peers.
- Most notably, the company shines in the Momentum category, scoring an impressive 82.24, ranking it in the top 6% out of 44,431 constituents after FN’s stock has rallied 75% from annual lows in May.
The combined QVM score for Fabrinet is 64.66, which, while impressive, is overshadowed by some other stocks. Although Fabrinet presents a strong profile based on these metrics, we believe there are five other stocks on our leaderboard that surpass it with even more robust QVM scores.
We have selected five stocks from our QVM leaderboard which you can check out below.
