Fabrinet’s Beat-and-Raise Strategy Falls Flat as Weakness in Datacom Weighs on Shares
Fabriner, a leading provider of optical solutions for the fiber sensing and precision optics markets, has released its quarterly earnings report, beating market expectations and raising its full-year guidance. However, despite the positive news, the company’s shares have taken a hit due to concerns over the weakness in its datacom business.
For the quarter ended June 2023, Fabrinet reported revenue of $141.1 million, exceeding the consensus estimate of $135.5 million. The company’s gross margin also expanded 120 basis points to 34.5%, driven by higher revenue and cost discipline. Net income per share rose 23% to $0.53, exceeding the street’s expectations of $0.46.
As a result, Fabrinet raised its full-year guidance, now expecting revenue of $560-590 million and diluted earnings per share of $1.95-2.05. This represents a 10-15% increase from the company’s previous guidance and is significantly higher than the current market consensus estimate of $540 million in revenue and $1.80 in earnings per share.
However, despite the strong performance in other areas, the company’s datacom business was a major drag on the stock, contributing to a 4.5% decline in Fabrinet’s shares today. While the company reported a 12% year-over-year decline in datacom revenue, which it attributed to "a significant backlog of non-cancellable orders that has exceeded our expectations," investors remain concerned about the sector’s vulnerability to broader economic trends.
"We are closely monitoring the datacom market, and while we are doing everything we can to mitigate the impact, we are not immune to the global trends," said Professor of the Company in a post-earnings conference call. "However, we remain confident in our ability to diversify our revenue streams and generate growth across our other businesses, including our precision optics and fiber sensing segments."
While Fabrinet’s datacom weakness may be a concern, the company’s diversified business model and solid track record of execution have earned it a reputation as a reliable and innovative player in the optical solutions space. As such, many investors may be willing to look through the weak datacom performance and focus on the company’s strong underlying fundamentals and growth prospects.
In light of the earnings report, analysts have been adjusting their estimates and revising their price targets for Fabrinet’s stock. The current consensus per-share target is $75.44, with a high and low of $80 and $65, respectively. The company’s shares are currently trading at around $66 per share, suggesting a potential 13-15% upside from here.
While Fabrinet’s datacom weakness may have put a dent in its stock price in the short term, the company’s solid quarterly results and guidance have positioned it well for long-term success. As investors tend to focus on the bigger picture, Fabrinet’s shares could see an upward revision as the company continues to deliver strong results and drive growth through its diverse business segments.
