Fabrinet Downgraded: Unbundling Concerns Emerge

Fabrinet, a leading provider of advanced optical packaging and precision manufacturing services, has recently been downgraded to 'Sell' from 'Neutral' by B. Riley Securities. This move comes amidst concerns about the potential loss of bundling with Nvidia's graphics processing units (GPUs) and the impact on Fabrinet's optics business. This article explores the implications of this downgrade and the broader market trends affecting Fabrinet and its peers.

Fabrinet's recent performance has been robust, with guided revenue for the current quarter between $800 million and $820 million, suggesting a 14% year-over-year growth at the midpoint. However, B. Riley's downgrade highlights potential headwinds stemming from the unbundling of Nvidia's GPUs, which have been in high demand. Amazon's decision to source components in-house or through other partners has raised concerns about the future of bundling, potentially impacting Fabrinet's revenue and earnings growth.



If other cloud hyperscalers, such as Microsoft and Meta Platforms, adopt a similar strategy to Amazon, Fabrinet's business could face further erosion. This could lead to reduced demand for Fabrinet's components, impacting its revenue and earnings growth. However, Fabrinet's strong business performance and diverse client base may help mitigate these risks.

Fabrinet's valuation multiples could also be affected by the potential loss of bundling with Nvidia. As Fabrinet's recent momentum has been driven by demand connected to Nvidia's GPUs, any erosion in this area could lead investors to assign lower valuation multiples to the company. B. Riley's new one-year price target of $178 suggests potential downside of 21% from the current stock price.



To mitigate the impact of the potential loss of bundling with Nvidia, Fabrinet could explore alternative revenue streams and partnerships. Diversifying its client base, expanding its product offerings, and forming strategic partnerships could help Fabrinet reduce its reliance on Nvidia and capitalize on emerging opportunities in the market.

In conclusion, Fabrinet's recent downgrade to 'Sell' from 'Neutral' by B. Riley highlights the potential risks associated with the loss of bundling with Nvidia. As Amazon and potentially other cloud hyperscalers move to source components independently, Fabrinet's business could face headwinds. However, Fabrinet's strong business performance and diverse client base may help mitigate these risks. Investors should monitor Fabrinet's performance and adapt their strategies accordingly, as the broader market trends and geopolitical dynamics continue to evolve.