Fabrinet initiated with Equal Weight at Barclays on valuation, rising competition

Barclays Capital began coverage of Fabrinet (NYSE:FN) with an Equal Weight rating, citing valuation and rising competition.

The firm has set a $292 price target on the shares of Fabrinet — which provides optical packaging and precision optical, electro-mechanical and electronic manufacturing services.

Analyst George Wang and his team said they believe that the upside is baked in at the current premium valuation. The analysts appreciate Fabrinet’s strong positioning with Nvidia’s (NVDA) optical transceivers, but noted that the timing and magnitude of uncertainty on the 1.6T ramp could be a concern for shares.

The analysts said that Fabrinet makes 800G optical transceivers for Nvidia and very-short-reach active optical cables, or AOC. The company is a key beneficiary of Nvidia’s networking ramp as the Fabrinet/Nvidia solution has had a strong hold on the overall transceiver market.

A 21% CAGR in the optical components market would be driven by data centers upgrading to higher port speeds such as 800G/1.6T and metro/regional backbone telecom networking migrating towards 400G/800G ZR and ZR+ solutions, according to the analysts.

Wang and his team added that Fabrinet has 100% share in Nvidia designed and branded Mellanox transceivers. However, Nvidia’s has qualified two merchant vendors (Coherent (COHR) and Innolight) for use in Nvidia’s network transceivers to complement the transceivers of the U.S. chip giant’s own design.

It helps Nvidia to secure supply and lower its cost base, according to the analysts. They expect Fabrinet’s market share to decline from the 40% to 50% today to 20% to 30% in two years.

In addition, the analysts said that the 1.6T upgrade cycle was slightly pushed out to early 2025 from December quarter 2024, with a material volume ramp not expected until the second half of 2025. The first generation of Blackwell can still use 800G transceivers, with the second-generation requiring 1.6T.

The analysts think that due to Fabrinet’s premium valuation, upside is likely baked in, and it needs a material acceleration of 1.6T to justify the next move higher. In addition, revenue upside is capped by near-term factory capacity limitation before Building 10 completes.

Barclays noted that it prefers Celestica (CLS) Flex (FLEX) and Jabil (JBL) in the electronics manufacturing services space and has Overweight ratings on them.

As AI footprints increasingly shifts to application-specific integrated circuit, or ASIC, and ethernet switching, the analysts believe Celestica should benefit with its outsized exposure to custom ASIC and ethernet.

The analysts added that Flex and Jabil still trade at a lower multiple and are set for a multiple re-rating once embedded AI growth accelerates.

Jabil is also becoming a bigger competitor to Fabrinet in the AI transceiver space, according to the analysts.