Fabrinet Just Lost Billions in Market Value Due to Nvidia. Here’s Why the Reaction Is Overdone.

Fabrinet (FN) recently delivered a strong quarter, yet the market still punished its shares. On Aug. 18, the company's stock dropped by nearly 20% despite results that surpassed expectations in nearly every category. Net revenue increased 45% from the previous year to a record $1.32 billion in the fiscal fourth quarter, beating estimates. Non-GAAP earnings per share (EPS) also outperformed, coming in at $4.10, above the anticipated $3.81. Additionally, management projected the next quarter to exceed forecasts.

However, one area of concern for investors was the slight decline in datacom revenue, which fell by 1% from the prior quarter. This marginal drop sparked heavy selling among those wary of Nvidia's influence on the business. While the company reported that datacom sales to Nvidia, a major customer, were down, Fabrinet's overall data-center revenue actually rose 13% sequentially and jumped 68% compared to a year ago.

In fact, this segment now constitutes more than half of Fabrinet's total sales. Management attributed the datacom dip to timing and program transitions rather than weaker demand and maintained a positive outlook on the data-center business, anticipating further growth in the following quarter. CFO Csaba Sverha emphasized that demand remains robust and accelerating.

Analysts did not seem alarmed by the news, with BNP Paribas maintaining an "Outperform" rating with a $750 price target.

Despite the recent selloff, the gap between Fabrinet's actual performance and the market reaction seems unjustified. The semiconductor sector, including Fabrinet, delivered a 58% return over the past year, trailing behind the broader semiconductor sector with a 115% gain for the iShares Semiconductor ETF (SOXX). Moreover, component shortages have curtailed datacom shipments, limiting the company's ability to fully exploit the thriving AI market.

Despite these challenges, Fabrinet's valuation appears reasonable, with a forward price-to-earnings (P/E) ratio of 27 times and a modest price-to-sales (P/S) ratio of 3.4 times. The earnings per share (EPS) outlook also appears promising, with analysts forecasting a 23% growth in fiscal 2027 and significant growth in fiscal 2028.

The company also boasts a solid financial foundation, with $876 million in cash and short-term investments and only $4 million in debt as of Q4. This effectively debt-free position further strengthens the argument for investors who believe the recent selloff was unjustified. With aggressive capacity expansion on the horizon, including the completion of Building 10 at its Chonburi campus in Thailand in early 2027, Fabrinet is positioned to add significant revenue capacity and reinforce its market position.