Expanding Into Telecom And Datacom Fuels Revenue Growth And Critical Expansions

Key Takeaways

• Expansion in datacom and telecom sectors, and strategic investments in manufacturing capacity, are poised to drive significant revenue growth.
  
• Focus on cost management and operational efficiencies, targeting higher non-GAAP earnings growth, indicates a potential positive impact on net margins and earnings per share.
  
• Heavy reliance on a few major customers and specific high-growth segments poses risks to revenue stability and earnings if market conditions shift.

Catalysts

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

• Continued growth in datacom, especially with 800-gig products for AI and related applications, is expected to drive revenue growth.
  
• The anticipated increase in demand for automotive and laser products hints at sequential revenue growth which should positively impact the company's revenue streams.
  
• Expansion efforts, such as the planned construction of a 2 million square foot facility in the Chonburi campus, will increase manufacturing capacity, catering to future demand, and thereby potentially increasing revenue.
  
• Recent system wins in the telecom sector, with expected meaningful revenue contributions in the second half of fiscal 2025, indicate a long-term positive trend in telecom revenue, which could boost overall company revenue.
  
• Management's focus on cost management and operational efficiencies, alongside strategic capital expenditure on expansion, is aimed at growing non-GAAP earnings faster than revenue, suggesting a positive impact on net margins and earnings per share.

Assumptions

• Analysts are assuming Fabrinet's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $503.5 million (and earnings per share of $14.43) by about August 2027, up from $296.2 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 23.3x on those 2027 earnings, down from 30.8x today. This future PE is greater than the current PE for the US Electronic industry at 22.4x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Risks

• The protracted inventory digestion across the telecom industry led to a decline in telecom revenue, impacting overall revenue growth and potentially future earnings if the trend continues.
  
• Significant customer concentration, with NVIDIA and Cisco comprising 48% of revenue, poses a risk to revenue stability and bargaining power, potentially affecting net margins if either customer reduces orders.
  
• The substantial investment in expanding manufacturing capacity (e.g., Building 10) represents a significant outlay of $110 million, posing a risk to cash reserves and possibly impacting financial flexibility and net income if demand does not meet expectations.
  
• Exposure to foreign exchange risk, particularly with the Thai Baht, could lead to revaluation losses, impacting earnings.
  
• Reliance on the high-growth datacom segment, especially 800-gig products, poses a risk if market demand shifts or technology advances more rapidly than expected, potentially affecting revenue and earnings growth sustainability.

Valuation

• The analysts have a consensus price target of $266.25 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 $196.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.6 billion, earnings will come to $503.5 million, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $252.06, the analyst's price target of $266.25 is 5.3% higher. 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.