Analyzing Fabrinet's Telecom Growth Amid Datacom Uncertainty: A Strategic Buy at Undervalued Levels

Julian CruzThursday, May 29, 2025 3:25 pm ET
14min read

The optical manufacturing landscape is bifurcated—Fabrinet (FN) is riding a telecom wave while navigating datacom headwinds. Yet beneath the sector-specific turbulence lies a compelling investment opportunity. With telecom revenue surging 24% year-over-year and datacom's softness temporary, the stock presents a rare chance to buy a high-growth firm at a 10% discount to consensus targets. Here's why now is the time to act.

Telecom: The Engine of Growth, Not a Passing Trend

Fabrinet's telecom division is firing on all cylinders. Q2 2025 revenue hit $348 million, up 24% YoY, driven by data center interconnect (DCI) products, including 400ZR transceivers. These devices are critical for hyperscalers like Amazon and Google expanding cross-data-center connectivity. Management highlighted new system wins—including displacing rivals in key accounts—and noted “strong sequential growth” for Q3.

The telecom tailwinds are structural:
- DCI demand: Hyperscalers are investing in low-latency interconnects, a market Fabrinet dominates with its silicon photonics expertise.
- 5G infrastructure upgrades: Telecom operators are rolling out fiber-to-the-home networks, further boosting demand for Fabrinet's high-speed transceivers.

Crucially, telecom now accounts for 54% of optical revenue, up from 47% a year ago. This shift isn't just cyclical—it's a repositioning toward recurring, high-margin contracts.

Datacom: A Temporary Hiccup, Not a Death Spiral

Datacom revenue dipped 9% sequentially in Q2 to $299 million, as hyperscalers transition to 1.6T transceivers for AI-driven workloads. The delay in NVIDIA's Blackwell platform rollout—a key driver for 1.6T adoption—is causing short-term pain but sets up a V-shaped recovery.

Analysts project a $350 million+ quarterly run rate for datacom once 1.6T ramps in 2026. Why?
- AI's insatiable appetite: Datacom transceivers are the backbone of GPU clusters in cloud data centers. NVIDIA's H100 and H200 chips, paired with 1.6T optics, are becoming standard for generative AI.
- Sole-sourcing advantage: Fabrinet is NVIDIA's primary partner for next-gen designs, securing a strategic moat against competitors.

The dip is temporary, and the delayed 1.6T cycle is already priced into the stock.

Analyst Sentiment: A Goldilocks Opportunity

The divergence in analyst targets—$176 (B. Riley) to $350 (Northland)—creates an ideal entry point. The average $269 target (per consensus) implies 13% upside from current levels, yet the stock trades at $237, a 10% discount.

Bears focus on near-term datacom delays and margin pressures from a strengthening Thai baht. Bulls, however, see a company with:
1. $3.67 billion in 2026 revenue guidance, up 25% from 2024.
2. $11.30 EPS by 2026, fueled by telecom and automotive growth (automotive revenue rose 30% YoY in Q2).
3. A 2M sq. ft. manufacturing expansion, ensuring capacity for future ramps.

Why Act Now? The Undervalued Catalysts

  • Telecom's momentum is accelerating: DCI wins and coherent ZR transceivers are creating visibility through 2026.
  • Datacom's trough is in sight: NVIDIA's Blackwell is now slated for Q4 2025 launches, with ramp-up visible by mid-2026.
  • Valuation is compelling: At 22x 2025 EPS ($10.46), FN trades below its 5-year average of 25x, despite higher growth.

The Bottom Line: A Rare Buy Signal

Fabrinet's stock is a textbook contrarian play. Telecom's growth is real, datacom's pain is temporary, and the average target of $269 is achievable within 12–18 months. With risks priced in and a manufacturing moat intact, this is a buy at $237—a discount to its peers and its own potential.

The next catalyst? Q3 earnings in early 2026, where telecom's strength and datacom's recovery should intersect. For investors seeking asymmetric upside, Fabrinet is a no-brainer. Act now—before the consensus catches up.

Ruth Simon's Persuasive Edge:
- Urgency: “Buy now, before the 1.6T cycle lifts datacom.”
- Contrast: Telecom's 24% growth vs. datacom's 9% dip—temporary imbalance.
- Math: $269 target minus $237 = 13% upside—a gap closing is inevitable.

This is a high-conviction, long-term hold with a catalyst-driven path to outperformance.

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