Next-generation 16 Terabit Datacom Products Will Revitalize The Sector

Key Takeaways

• Capacity expansion and strategic product ramps are poised to drive significant growth in revenue and market share across telecom and high-growth markets.
  
• Share repurchase programs reflect management's confidence in future earnings growth, aiming to enhance EPS and shareholder value.
  
• Potential delays in next-gen technology ramp and increased competition could impact Fabrinet's revenue and market share amidst margin and cash flow pressures.

Catalysts

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

• Fabrinet is expanding its manufacturing capacity by over 50% with the construction of a new facility, which should support future growth and increase revenue potential.
  
• The company is confident about increasing demand and additional market share in high-growth markets, expected to boost both revenue and profitability.
  
• Fabrinet has strategic system wins and strong momentum in telecom driven by demand for data center interconnects and coherent ZR technologies, which should drive telecom revenue growth.
  
• Upcoming ramp of next-generation datacom products, specifically the 1.6 terabit rate, is anticipated to revitalize growth in that sector, positively impacting revenue.
  
• Share repurchase programs, including a recently authorized additional $100 million, are set to improve EPS by reducing outstanding shares and demonstrating management's confidence in sustained earnings growth.

Fabrinet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fabrinet's revenue will grow by 14.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.4% today to 9.9% in 3 years time.
• Analysts expect earnings to reach $464.9 million (and earnings per share of $12.16) by about March 2028, up from $326.0 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 24.6x on those 2028 earnings, up from 24.5x today. This future PE is greater than the current PE for the US Electronic industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Fabrinet Future Earnings Per Share Growth

Risks

• There is potential revenue impact due to bumpiness in the datacom segment, with a 9% decline from the first quarter and anticipated slight decrease in demand in the third quarter before next-generation technologies ramp up.
  
• There are risks to margins from potential continued FX headwinds, as Q1 FX tailwinds turned into slight headwinds in Q2, affecting gross margins which decreased from 12.7% to 12.4%.
  
• Near-term revenue could be affected by potential delays in the ramp of next-generation 1.6 terabit datacom technologies, which impacts the timing of datacom revenue recovery and growth.
  
• Higher anticipated CapEx outlay for building new manufacturing capacity could impact free cash flow in the coming quarters if revenue growth does not compensate adequately.
  
• Increased competition from other suppliers in silicon photonics and optical communication products could impact Fabrinet's ability to maintain its market share and revenues, particularly as pricing pressures persist.

Valuation

• The analysts have a consensus price target of $264.0 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 $300.0, and the most bearish reporting a price target of just $178.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.7 billion, earnings will come to $464.9 million, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $222.62, the analyst price target of $264.0 is 15.7% higher.
• 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.