Why Fabrinet Shed Nearly A Quarter of Its Value This Week

Shares of chip and optical packaging giant Fabrinet (NYSE: FN) sank 23.4% this week, according to data from S&P Global Market Intelligence.

Fabrinet released its fiscal fourth quarter earnings report on Monday. While the numbers handily beat Wall Street analyst estimates and management guided ahead of consensus, the results apparently weren't enough for investors looking for an even bigger beat.

Like many AI-related stocks, Fabrinet has already posted strong gains over the past year and trades at an expensive-looking valuation. Furthermore, other macroeconomic factors appeared to weigh on AI-related semiconductor stocks this week.

A sterling quarter is no longer enough

In its fiscal fourth quarter, Fabrinet's revenue surged 45% to $1.32 billion, while adjusted (non-GAAP) earnings per share rallied 54.7% to $4.10. Both figures beat analyst expectations. Management also guided revenue for the current quarter to $1.38 billion to $1.43 billion, with adjusted EPS between $4.10 and $4.25, both of which beat analyst consensus estimates.

Still, that wasn't enough for buy-side investors who were apparently looking for more after the stock had surged this year. Even after this week's drop, Fabrinet is up 57% over the past year, and its stock trades at 33.5 times earnings.

That's actually not wildly expensive for a stock growing this fast, but investors may be skeptical regarding the sustainability of growth. Furthermore, Fabrinet doesn't design semiconductors, nor is it a chip fabrication company. Rather, it packages chips into complex systems and makes them all work together. That's a valuable service, and Fabrinet is clearly executing very well; however, the company operates on relatively low gross margins.

Furthermore, Fabrinet's gross margins actually declined year-over-year, from 12.5% a year ago to 12.2% last quarter. That said, adjusted operating margins expanded from 10.7% to 10.9% as gross profit growth outpaced operating expense growth.

In addition, other factors appeared to weigh on AI-related semiconductors this week. This included rising long-term interest rates, investor concerns about the War in Iran, and a growing backlash against data center construction in the U.S.

Image source: Getty Images.

But the sell-off could be an opportunity

While there are some valid investor concerns, this investor would lean more toward viewing Fabrinet's pullback as an opportunity to buy the dip. While the company operates on a low margin, the business is fairly capital-light, and it earned a very high return on invested capital of over 38% in each of the past two years.

While investors probably shouldn't expect 45% growth every year, Fabrinet should continue to benefit from its expertise in co-packaged optics, as AI data centers transition from copper interconnects to optical interconnects in the years ahead.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.