Fabrinet: A Moat in Optical and Precision Manufacturing

Fabrinet is a global manufacturing company that focuses on building highly complex optical, electronic, and precision products. Its core business is in optical communications, where it makes components such as transceivers, lasers, and optical cables used in cloud data centers and telecom networks. The company has also expanded into areas like medical devices and automotive sensors, giving it new sources of growth. What makes Fabrinet stand out is its ability to handle the full manufacturing process, from design and prototyping to assembly and testing, all while keeping costs low with its large facilities in Thailand. With growing demand for faster data connections, 5G networks, and advanced sensing technologies, Fabrinet is well positioned to benefit from long-term industry trends. The question is: Should this specialist manufacturer be part of your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should mention that I do not own any shares in Fabrinet at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Fabrinet, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Fabrinet is a global leader in outsourced manufacturing for complex optical, electro-mechanical, and electronic products. Its main business is producing optical communications components like transceivers, ROADMs, tunable lasers, and optical cables. The company has also expanded into areas such as automotive sensors, industrial lasers, and medical devices, which give it additional opportunities for growth. What sets Fabrinet apart is its ability to handle the entire manufacturing process, from early design and prototyping to supply chain management, advanced optical packaging, circuit board assembly, system integration, and final testing. Its operations are flexible enough to manage both small, specialized production runs and large-scale manufacturing, making it a reliable partner for OEMs that need precision and expertise for their most complex products. The company runs large, cost-efficient manufacturing campuses in Thailand, with additional facilities in the United States, China, and Israel that provide both scale and global reach. Many customers depend on Fabrinet as their only outsourced manufacturing partner for critical optical and precision assemblies, reflecting the trust placed in its capabilities. Fabrinet’s competitive moat is built on its deep specialization in optics and precision assembly, which enables it to produce highly complex products that general contract manufacturers cannot replicate. Its in-house expertise in photonics, materials science, and optics engineering supports the design and fabrication of custom crystals, lenses, mirrors, and glass components, helping customers streamline supply chains while improving cost and quality. The company also uses a “factory-within-a-factory” model, creating secure and dedicated production areas for each customer to safeguard intellectual property and strengthen trust. Unlike vertically integrated competitors, Fabrinet does not compete with its customers in their end-markets, positioning itself as a neutral and aligned partner. Supported by its cost-efficient footprint in Thailand, vertical integration in custom optics, and close engineering collaboration that often improves product designs and yields, Fabrinet has established a durable moat as the preferred manufacturing partner for leading photonics and precision device OEMs. Its growth continues to be driven by rising demand for optical connectivity in cloud data centers and telecom networks, as well as expanding opportunities in automotive sensing, industrial lasers, and medical technology.

Management

Seamus Grady serves as the CEO of Fabrinet, a role he assumed in 2017. He brings more than two decades of leadership experience in the technology and manufacturing industries, with a strong background in operations, supply chain management, and precision manufacturing. Prior to joining Fabrinet, Seamus Grady was Executive Vice President and Chief Operating Officer at Sanmina Corporation, where he was responsible for the company’s worldwide operations, overseeing a broad range of complex manufacturing services across multiple industries. His career also includes senior leadership roles at Nypro, a global provider of precision plastic products, where he gained extensive experience in contract manufacturing and global operations. As CEO of Fabrinet, Seamus Grady has focused on strengthening the company’s position as a trusted partner for leading OEMs in optical communications and precision product markets. Under his leadership, Fabrinet has expanded its customer base, deepened its engineering capabilities, and maintained a strong operational footprint in Thailand while enhancing its presence in the United States, China, and Israel. His emphasis on operational excellence, intellectual property protection, and long-term customer relationships has helped the company build on its reputation as the go-to manufacturing partner for complex optical and electro-mechanical assemblies. Seamus Grady holds a Bachelor of Engineering degree from the University of Limerick in Ireland. His leadership is often described as pragmatic and execution-focused, with a strong orientation toward customer alignment and sustainable growth. As CEO, he continues to guide Fabrinet in capturing opportunities in high-growth markets such as cloud data centers, telecom infrastructure, automotive sensing, and medical technology, while reinforcing the company’s competitive moat in precision manufacturing.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Fabrinet has consistently generated a ROIC above 10% in the past decade, a sign of the strength of its business model. Unlike many contract manufacturers that focus on low-margin, high-volume products, Fabrinet specializes in complex, high-value optical and precision assemblies where its engineering expertise and custom optics capabilities set it apart. This focus allows the company to earn higher margins, while its capital needs remain relatively modest compared to the revenue it brings in. Its large campuses in Thailand add to this efficiency by providing a cost-effective base of operations, helping Fabrinet sustain strong ROIC year after year. Fabrinet’s ROIC rose slightly in fiscal year 2025, helped by steady margins, growth in optical communications, and careful control of capital spending. Even so, it stayed below the record level reached in 2023. That year saw an unusual surge in demand for optical communications, especially from cloud data centers, which boosted revenue and operating leverage. In 2025, the company remained highly profitable, but the revenue mix shifted, with a smaller share coming from higher-margin areas like industrial and automotive. This mix effect helps explain why ROIC did not reach the peak of 2023. Looking ahead, Fabrinet is well positioned to keep ROIC above 10% thanks to its strong relationships with leading OEMs, its unique moat in optical manufacturing, and its flexible, cost-efficient production base. Whether ROIC moves higher will depend on growth in its most profitable areas, especially cloud and telecom, as well as its success in expanding further into automotive, medical, and industrial markets. Over the long run, Fabrinet’s business model makes it likely that the company will continue generating strong returns, even if results vary from year to year depending on product mix and market demand.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Fabrinet has managed to grow its equity every year for the past decade, largely because of its steady profitability and disciplined financial approach. By focusing on complex, high-value products, the company has consistently earned strong margins, allowing it to build retained earnings year after year. Unlike many manufacturers, Fabrinet has kept debt levels low and avoided issuing new shares, so equity growth has come almost entirely from reinvested profits. At the same time, rising demand in areas such as cloud data centers, telecom networks, automotive sensing, and medical devices has supported both revenue and earnings growth. Even in years of heavy investment, the company’s profits have more than offset spending, which explains why equity has grown by more than 10% annually in nearly every year of the past decade.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Fabrinet’s free cash flow took a big step up in fiscal year 2018 and has nearly doubled since then. This reflects the company’s steady revenue growth, strong margins, and disciplined financial management. In fiscal year 2025, free cash flow came down compared to 2024, mainly because capital expenditures increased, driven by the construction of Building 10 and investments to support new customer programs. While these projects reduced near-term cash generation, they are designed to support growth in the years ahead. Looking ahead, free cash flow is expected to increase over time as long as revenue continues to grow in optical communications and other segments, and as capital spending returns to a more normal pace after the current expansion projects. Even with higher spending, Fabrinet delivered strong cash flow and returned $126 million to shareholders through share repurchases in fiscal 2025, the largest buyback in its history. The company also entered fiscal 2026 with $174 million still available for repurchases. Management has emphasized that its top priorities are investing in future growth and returning value to shareholders. Free cash flow yield is at its lowest point since fiscal year 2017, suggesting that the stock is currently trading at a premium. We will return to valuation later in the analysis.

Debt

Another important area to look at is debt, and a useful way to assess this is by dividing total long-term debt by earnings to see if it could be paid off within three years. For Fabrinet, this calculation is not even necessary because the company has no long-term debt. This is a very positive sign. A debt-free balance sheet gives Fabrinet more flexibility and lowers financial risk since it does not need to make interest payments or worry about refinancing loans. For a contract manufacturer, this is especially valuable because demand in end markets like cloud or telecom can move in cycles. Without debt, Fabrinet is better positioned to navigate those cycles and still invest in capacity and technology when needed. It also means more of the company’s cash flow can go toward growth initiatives, share buybacks, or other ways of returning value to shareholders.

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Risks

Customer concentration is a risk for Fabrinet. A large portion of its revenue is tied to a small number of customers, and in fiscal year 2025 NVIDIA and Cisco together represented almost half of total revenue, while the top ten customers accounted for 86%. This dependence means that any reduction in orders, loss of a customer, or shift in sourcing strategy could have an outsized impact on Fabrinet’s results. The nature of Fabrinet’s business adds to this risk. Optical devices require a lengthy qualification process that can take months to complete, and customers typically test production processes extensively before awarding business. If a major customer were to walk away, Fabrinet would find it difficult to quickly replace that revenue, since winning and qualifying new programs takes time. Consolidation in the optical communications industry increases the risk further. When companies such as Cisco, Nokia, or Lumentum acquire optical suppliers, they may internalize manufacturing or rationalize their supplier base, which can reduce demand for Fabrinet’s services. Fewer, larger customers also have greater bargaining power and can push for price concessions, putting pressure on margins. Customer concentration also creates risk on the balance sheet. Because so much of Fabrinet’s revenue comes from a few customers, a late payment or default by even one of them could have a noticeable impact on cash flow. This is not just a theoretical risk, the optics industry has already seen bankruptcies, acquisitions, and companies pulling out of certain markets, any of which could leave Fabrinet with unpaid bills or costs it cannot recover. In short, Fabrinet’s close relationships with leading tech companies are a strength but also a double-edged sword. The company benefits from being trusted with critical, high-value programs, but its dependence on a concentrated set of customers means its revenue, margins, and cash flow could be hit hard if even one major partner pulls back.

Competition is a risk for Fabrinet because its customers always weigh the option of keeping manufacturing in-house versus outsourcing. Many of Fabrinet’s largest customers already have internal manufacturing capabilities, and when demand slows or they have excess capacity, they may shift production away from Fabrinet to fill their own factories. This happened in past downturns, and it remains a risk whenever the market becomes cyclical. If customers choose to produce more internally, Fabrinet could lose revenue that would be difficult to replace quickly. Fabrinet also faces direct competition from other contract manufacturers such as Sanmina, Jabil, Celestica, and Benchmark, as well as specialized optics and glass makers like Fujian Castech and Photop Technologies. Many of these companies are larger, better known, and have deeper financial resources, which allow them to spend more on research, marketing, and pricing strategies. Larger competitors can afford to undercut prices, offer bundled services, or make aggressive hiring moves to attract Fabrinet’s engineers and suppliers. Industry consolidation could also create stronger rivals with broader global reach. Technology shifts add another layer of risk. If new optical designs simplify manufacturing, or if advances in automation make it easier and cheaper for customers to handle assembly themselves, Fabrinet’s value as a specialist could erode. This is particularly relevant in areas like photonic integrated circuits or chip-scale photonics, which could reduce the complexity of optical packaging and assembly. To maintain its edge, Fabrinet must continue investing in advanced processes and capabilities, but there is no guarantee that competitors will not catch up or leap ahead. In short, while Fabrinet has carved out a strong position in optical and precision manufacturing, its business depends on staying technologically ahead and offering capabilities that customers cannot easily replicate. If competitors or customers close that gap, Fabrinet could face pricing pressure, margin erosion, or loss of market share.

Supply constraints are a risk for Fabrinet because the company depends on a limited number of suppliers for many of the critical components that go into its products. In some cases, key parts such as semiconductors, lasers, or custom optics come from a single source. Fabrinet does not have long-term supply agreements with most of these suppliers, relying instead on rolling purchase orders. This means that if a supplier faces longer lead times, capacity issues, or other disruptions, Fabrinet may not be able to secure the parts it needs on schedule. That can delay production, reduce revenue, and strain relationships with customers who rely on timely delivery. The semiconductor shortage in recent years shows just how serious supply chain risks can be for Fabrinet. Producing wafers, which are the foundation for semiconductors, can take as long as 30 weeks. When demand for chips in fast-growing areas like cloud data centers and communications rises faster than supply, bottlenecks quickly emerge. Fabrinet has already felt this impact. Management explained that demand for the newest high-speed optical modules, such as 800G and 1.6T products, has surged. But a few critical parts needed for these modules, particularly components used in 200-gig per lane EML-based transceivers, have been difficult to secure in the quantities required. Even though the shortage only affects a small number of components, it is enough to hold back production and reduce revenue in the datacom segment. Even when supply disruptions are temporary, they highlight how exposed Fabrinet is to bottlenecks in its supply chain. Beyond delays, shortages can also drive up costs if the company is forced to substitute more expensive parts or pay higher prices to secure inventory. In extreme cases, defects or contaminated materials could also disrupt production. Because Fabrinet operates in markets where customers rely on very precise and timely delivery, supply chain issues can quickly impact both profitability and customer trust.

Reasons to invest

Favorable trends is a reason to invest in Fabrinet. The company is positioned at the center of several powerful long-term shifts in technology, which are driving steady demand for its capabilities. One of the most important is the expansion of hyperscale cloud and artificial intelligence infrastructure, where data centers require ever-faster connectivity. The industry is now moving from 400G to 800G and 1.6T optical transceivers, and Fabrinet is a key manufacturing partner for these next-generation products. Demand for data center interconnect solutions is already outpacing supply, and Fabrinet is scaling production to meet this wave of growth. Telecom networks are another tailwind. As operators continue to upgrade to 5G and beyond, Fabrinet benefits from increased demand for optical systems and components. The company has also begun ramping volume production of a new telecom system for a major customer, which should support momentum moving forward. Beyond cloud and telecom, secular growth in optical sensing for automotive and medical applications adds further opportunities. Automakers are embedding more optical sensors for safety and autonomy, while the medical industry is adopting optical technologies for diagnostics and monitoring. These markets are smaller today but are expected to expand significantly over time, giving Fabrinet new avenues for growth. What ties these trends together is Fabrinet’s niche technical expertise in optical packaging and precision assembly, which few competitors can match. As demand rises across multiple end markets, Fabrinet is not reliant on a single growth driver but is benefiting from several at once, cloud, telecom, automotive, and medical.

The Amazon partnership is a reason to invest in Fabrinet because it gives the company a direct role in one of the fastest-growing parts of the tech world: AI and cloud data centers. In March 2025, Fabrinet signed a deal with Amazon Web Services (AWS) that included a warrant giving Amazon the right to buy up to 381.922 Fabrinet shares. While the warrant itself is not the main story, it shows Amazon’s long-term commitment and ties its financial interest to Fabrinet’s success. The bigger point is that AWS has chosen Fabrinet as a key manufacturing partner for high-performance compute hardware, which is essential for running AI workloads in massive data centers. Management has said this business could be “significant,” with AWS potentially becoming one of Fabrinet’s top customers. Revenue from AWS is already being broken out into a new category called high-performance compute, with shipments beginning in late 2025 and ramping up through 2026. This matters because demand for faster, more powerful optical components is exploding as cloud providers upgrade from 400G to 800G and 1.6T transceivers. Fabrinet’s expertise in advanced optical packaging makes it one of the few companies able to meet these needs at scale. By winning AWS as a customer, Fabrinet is not just adding another revenue stream, it is securing a position at the heart of the AI data center buildout. The deal also strengthens Fabrinet’s credibility with other hyperscale cloud providers. Management has already said the AWS partnership has sparked discussions with additional cloud and transceiver customers, which could bring even more opportunities. In short, the AWS partnership is more than just a contract, it is a door into a massive and growing market, with the potential to make Amazon one of Fabrinet’s biggest customers and to open new opportunities with others in the same space.

Expanding capacity is a reason to invest in Fabrinet because it shows the company is preparing for sustained growth and increasing demand from its largest markets. The centerpiece of this expansion is Building 10, a new facility at the Thailand campus that will add 2 million square feet to Fabrinet’s total footprint. Management has even decided to accelerate part of the construction schedule so that sections of the building can be brought online earlier than planned, a clear signal that customer orders are ramping faster than expected. This move is not just about adding space, it is about enabling Fabrinet to support multiple growth drivers at once. Demand is rising in telecom, datacom, and high-performance compute, with customers such as Amazon Web Services expected to become major contributors. By accelerating Building 10, Fabrinet ensures it can capture these opportunities without being constrained by capacity. The company has already said it sees a clear path toward reaching $1 billion in quarterly revenue, and expanding its facilities is essential to achieving that milestone. Notably, Fabrinet’s Thailand operations enjoy favorable tax incentives. Income from new buildings, including Building 10, is tax-exempt through 2031. This means the expansion not only boosts production capacity but also supports profitability by allowing revenue growth without a proportional rise in tax expenses. Importantly, Fabrinet is expanding from a position of strength. Its Thai operations provide a cost-efficient base, and the company remains debt-free with strong cash reserves, meaning it can fund the buildout without overstretching its balance sheet. The ability to add capacity quickly, while maintaining financial flexibility, gives Fabrinet an edge over competitors who may not be able to scale as fast or as efficiently.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 9,17, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 20,2% over the next five years, but 15% is the highest I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Fabrinet's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $275,10. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Fabrinet at a price of $137,55 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 328, and capital expenditures were 121. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 85 in our calculations. The tax provision was 23. We have 35,8 outstanding shares. Hence, the calculation will be as follows: (328 – 85 + 23) / 35,8 x 10 = $74,30 in Ten Cap price. 

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Fabrinet's free cash flow per share at $5,79 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $91,40.

Conclusion

I believe Fabrinet is an intriguing company led by strong management. It has built a moat through its deep specialization in optics and precision assembly, enabling it to produce highly complex products that general contract manufacturers cannot replicate. The company has consistently generated a high ROIC, a trend that is expected to continue. Free cash flow declined in fiscal year 2025 due to a sharp increase in capital expenditures, which more than doubled from the prior year, but it is expected to grow again as spending normalizes. Risks remain, most notably customer concentration, with NVIDIA and Cisco together accounting for nearly half of revenue in fiscal 2025, meaning the loss of a major customer or pressure on pricing could significantly affect results. Competition is another risk since customers could bring manufacturing in-house or turn to rivals with greater scale and resources, while technological advances that simplify production could also reduce Fabrinet’s edge. Supply constraints pose additional challenges because the company depends on a limited number of suppliers for key components such as semiconductors and lasers, making it vulnerable to delays or shortages, as seen recently when a lack of parts for high-speed optical modules weighed on datacom growth. On the positive side, Fabrinet is positioned at the center of powerful trends such as AI-driven data centers, 5G upgrades, and growing adoption of optical sensing in cars and medical devices, all of which provide multiple growth avenues. Its recent partnership with Amazon Web Services underscores this opportunity, giving Fabrinet a direct role in supplying high-performance compute hardware for AI data centers while also enhancing its credibility with other hyperscalers. The expansion of its Thailand operations through Building 10, which adds 2 million square feet of tax-advantaged capacity, further strengthens growth prospects and profitability, supported by a debt-free balance sheet and strong cash reserves. Overall, I believe Fabrinet is a high-quality company, and buying shares at the margin of safety price of $137 would be an attractive long-term investment.

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