Accelerating Cloud, 5G And 6G Trends Will Fuel Advanced Photonics

Key Takeaways

• Expanding partnerships, investments in automation, and rapid capacity growth position Fabrinet for strong margin expansion and resilience amid supply chain volatility.
  
• Rising demand in telecom, AI-driven electronics, and outsourced photonics manufacturing enable durable, diversified revenue acceleration beyond current market expectations.
  
• Heavy reliance on a few large customers, sector commoditization, and rising vertical integration at clients expose Fabrinet to persistent margin and revenue risks.

Catalysts

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

• Analysts broadly agree the Amazon Web Services partnership can drive incremental revenue in fiscal 2026, but this may actually serve as only a minimum baseline; given Fabrinet's rapid expansion and multi-product engagement, there is potential for Amazon to quickly scale toward becoming a top-10 customer, with a multi-year revenue contribution that could meaningfully lift overall earnings power and improve operating leverage.
  
• Analyst consensus expects telecom strength from 400ZR and system wins to support growth, but this overlooks how recurring, multi-year global 5G and upcoming 6G deployments-in combination with expanding high-speed optical needs-could result in structurally higher, stickier telecom revenues and sustained double-digit net margin improvements.
  
• High growth in complex non-optical segments such as automotive and industrial lasers demonstrate Fabrinet's unique ability to serve AI-driven electronics, autonomous vehicles, and smart industrial markets, suggesting that as digital transformation accelerates across industries, Fabrinet is positioned for long-tailed, diversified revenue acceleration beyond current projections.
  
• Consistent, material investments in automation and the accelerated timeline for Building 10 expansion could unlock earlier-than-expected capacity additions and margin expansion, with improved process efficiency and geographic diversification driving both revenue growth and net margin resilience irrespective of global supply chain turbulence.
  
• As OEMs increasingly outsource advanced photonics and co-packaged optics manufacturing amid rising technology complexity and capital intensity, Fabrinet is set to seize a larger share of the expanding addressable market, paving the way for sustained operating income growth and best-in-class free cash flow generation.

Fabrinet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Fabrinet compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Fabrinet's revenue will grow by 16.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.0% today to 10.3% in 3 years time.
• The bullish analysts expect earnings to reach $526.5 million (and earnings per share of $15.28) by about July 2028, up from $326.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 30.2x on those 2028 earnings, down from 33.0x today. This future PE is greater 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

• High customer concentration is evident, as declines in datacom revenue are repeatedly attributed to transitions and share allocations at large customers, which leaves Fabrinet vulnerable to customer churn or pricing pressure that could lead to reduced revenue and cash flow volatility over time.
  
• The company explicitly notes that price uplifts from new technologies, such as the transition from 800-gig to 1.6 terabit transceivers, are "less than you might imagine," reflecting overall sector commoditization and downward pressure on average selling prices, which can erode both future revenue growth and net margins.
  
• Long-term risks from vertical integration loom as large hyperscale customers like Amazon expand their capabilities, potentially limiting Fabrinet's growth by shrinking the addressable outsourced manufacturing market and putting future revenue at risk if these customers decide to bring production in-house.
  
• Margin pressure is visible due to Fabrinet's limited pricing control in its outsourced manufacturing model, with short-term gross margin compression attributed to new program ramps and initial start-up costs for new customer projects, which may persist as customers continue to push for cost savings, reducing long-term profitability and earnings.
  
• Although Fabrinet has not yet seen material impacts from tariffs or export controls, rising geopolitical tensions and the prospect of tighter trade regulations in the US-China corridor and beyond represent an ongoing risk to supply chain reliability and customer demand, potentially leading to revenue volatility and margin compression in future periods.

Valuation

• The assumed bullish price target for Fabrinet is $375.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Fabrinet's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $526.5 million, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 7.6%.
• Given the current share price of $300.79, the bullish analyst price target of $375.0 is 19.8% 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.