On Wednesday, B.Riley adjusted its stance on Fabrinet (NYSE: NYSE:FN) stock, a provider of precision optical, electro-optical, and electronic manufacturing services, moving from a "Neutral" to a "Sell" rating. The firm also revised the company's price target downward from $194.00 to $178.00.
The decision comes in the wake of concerns that the trend of unbundling NVIDIA's (NASDAQ: NVDA) GPU platforms could negatively affect Fabrinet's optics business.
According to the firm's analysis, the change in the rating and price target is based on a reduced cash-adjusted price-to-earnings (P/E) multiple of 16 times, down from 17 times, applied to the fiscal year 2026 earnings per share estimate.
The optics supplied by Fabrinet are part of the integrated solutions in NVIDIA's GPU platforms, which have been purchased by major tech companies like Amazon (NASDAQ: NASDAQ:AMZN), Microsoft (NASDAQ: NASDAQ:MSFT), and Meta Platforms (NASDAQ: NASDAQ:META).
These tech giants, referred to as hyperscalers, have been significant customers of NVIDIA's GPU platforms, such as the HGX H100, which includes various components, including optics. However, the firm's recent checks suggest that Amazon is set to alter its purchasing strategy to buy only NVIDIA's GPUs and create its own platforms. This shift is anticipated to directly affect NVIDIA's optics business, as it stands to lose a major customer in Amazon.
The report further suggests that this unbundling trend could pose a threat to Fabrinet's optics business, as it is likely only a matter of time before Microsoft and Meta follow Amazon's lead. The concern is that these companies, which have the capability to produce their own GPUs and necessary technologies, may opt to internalize production, thereby reducing their reliance on external suppliers like Fabrinet.
In other recent news, Fabrinet has reported robust financial growth, with a 17% year-over-year revenue increase to $804 million in its Q1 earnings call. This progress is primarily attributed to the company's strong performance in optical communications, particularly in the Datacom and Telecom (BCBA:TECO2m) sectors, and automotive sales in EV charging infrastructure.
Barclays (LON:BARC) and Needham have recently initiated coverage on Fabrinet, with Barclays assigning an Equalweight rating and a price target of $292, while Needham conferred a Buy rating with a price target of $280. Both firms recognized Fabrinet's strategic partnership with Nvidia (NASDAQ:NVDA) and the anticipated ramp-up of 1.6 terabit transceivers as key growth drivers.
However, Barclays expressed caution regarding the company's premium valuation, suggesting that the current share price already reflects the optimistic outlook.
Fabrinet's revenue forecast for Q2 FY2025 is between $800 million and $820 million, indicating the company's positive outlook despite acknowledged delays by Nvidia in the Blackwell project. Lastly, Fabrinet is expanding its footprint with the ongoing construction of Building 10, demonstrating the company's commitment to future growth.
InvestingPro Insights
While B.Riley has downgraded Fabrinet to a "Sell" rating, it's important to consider additional financial metrics and insights. According to InvestingPro data, Fabrinet's market capitalization stands at $9.02 billion, with a P/E ratio of 29.07. The company has demonstrated strong revenue growth, with a 17.32% increase in quarterly revenue as of Q1 2025.
InvestingPro Tips highlight that Fabrinet holds more cash than debt on its balance sheet, which could provide financial flexibility in the face of potential market challenges. Additionally, five analysts have revised their earnings upwards for the upcoming period, suggesting some positive sentiment despite the concerns raised by B.Riley.
However, it's worth noting that Fabrinet suffers from weak gross profit margins, which aligns with the concerns about potential impacts on its optics business. The gross profit margin stands at 12.35% for the last twelve months as of Q1 2025.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Fabrinet, providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.