Today's dive in Fabrinet's share price can be attributed to...
Today's dive in Fabrinet's share price can be attributed to...
Fabrinet's (FN, 0.83%) shares experienced significant drops in Wednesday's trading. The engineering and manufacturing firm closed the day with a 9% decrease, and at one point during trading, the shares had fallen as much as 13.6%.
B. Riley changed its stance on Fabrinet's stock, switching its rating from neutral to sell. The company also reduced its one-year price target for Fabrinet's shares from $194 to $178, which indicates a potential downside of 21% based on the current closing price.
Will Fabrinet's optics sector be affected by the decoupling from Nvidia?
B. Riley's analysts predict that Fabrinet's business may face challenges due to a decline in demand for product bundles associated with Nvidia's graphics processing units (GPUs). Nvidia's GPUs have been highly sought after, and third-party components like Fabrinet's have often been included in these bundles.
However, Amazon is now planning to purchase only Nvidia's GPUs and procure additional components from other sources or partners. B. Riley's analysts believe that other major cloud providers, such as Microsoft and Meta Platforms, will likely adopt a similar strategy.
What's ahead for Fabrinet?
Fabrinet has experienced strong business growth in conjunction with the demand for AI-related applications. Based on its latest financial report, the company anticipates revenue between $800 million and $820 million in the current quarter, indicating a year-over-year growth of approximately 14% at the midpoint of the range. Meanwhile, the company's midpoint target for adjusted earnings per share indicates an annual growth of roughly 19%.
Despite this, the company is expected to meet its Q2 guidance ranges. However, potential challenges from unbundling could negatively impact performance in the future. Fabrinet's recent growth has been fueled by demand for Nvidia's GPUs. A decrease in this demand could lead to lower valuation multiples being assigned to the company.
In response to B. Riley's downgrade of Fabrinet's stock and lowered price target, investors might reconsider their strategies for financing or investing in the company. The changing market conditions and potential decreased demand for Fabrinet's components in Nvidia's product bundles could impact the company's financial health in the future.