AWS Partnership And Telecom Wins Will Unlock Future Potential

Key Takeaways

• Key partnerships and telecom growth drive anticipated revenue and earnings increases, with significant opportunities through advanced manufacturing and datacom products.
  
• Capacity expansion and share repurchases signal confidence in long-term growth, with potential positive impacts on margins and earnings per share.
  
• Sequential decline in datacom revenue and short-term margin headwinds signal revenue and earnings instability amid broader economic uncertainties.

Catalysts

Provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services in North America, the Asia-Pacific, and Europe.

• The partnership with Amazon Web Services, which includes a warrant purchase agreement, is a key catalyst expected to boost revenue starting in fiscal year 2026, as Fabrinet will provide advanced manufacturing services.
  
• Strong telecom growth, driven by recent system wins and 400ZR momentum for data center interconnect applications, is anticipated to continue contributing to increased revenue and earnings in future quarters.
  
• The anticipated ramp-up of 1.6T datacom products provides a promising pathway for future revenue growth, as the steepest part of the transition is yet to come.
  
• The expansion of Building 10, which is on track, will enhance Fabrinet's capacity to meet long-term demand, potentially influencing revenue and operating margins positively.
  
• Share repurchase activity, with over $100 million repurchased this fiscal year, underlines confidence in long-term growth and can lead to enhanced earnings per share (EPS).

Fabrinet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fabrinet's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.0% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $502.5 million (and earnings per share of $14.46) by about July 2028, up from $326.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 33.0x today. This future PE is lower than the current PE for the US Electronic industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 0.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Fabrinet Future Earnings Per Share Growth

Risks

• Fabrinet has encountered a sequential decline in datacom revenue due to product transitions at a large customer and fluctuations at other customers, indicating potential revenue instability in this segment.
  
• The company's gross margin faced a 40 basis point impact due to a warrant agreement with Amazon, signaling potential further earnings pressure from similar agreements or new product ramp costs.
  
• The anticipated softness in datacom and moderating growth in automotive could pose risks to revenue consistency if these sectors do not recover or continue to experience fluctuations.
  
• Short-term margin headwinds are expected due to significant product ramps, and these initial costs might affect net margins until new products are fully operational and scalable.
  
• The broader economic environment, including global tariffs and macroeconomic uncertainties, could pose risks to revenue and profitability if external conditions worsen or disrupt supply chains and demand.

Valuation

• The analysts have a consensus price target of $275.56 for Fabrinet based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $375.0, and the most bearish reporting a price target of just $172.04.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.0 billion, earnings will come to $502.5 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 7.6%.
• Given the current share price of $300.79, the analyst price target of $275.56 is 9.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.