Barclays maintains Fabrinet stock with $245 target on AWS deal

Tuesday, Fabrinet (NYSE:FN) received reaffirmation of its Equalweight rating and a steady price target of $245.00 from Barclays (LON:BARC). The firm’s recent initiation of a direct relationship with Amazon Web Services (AWS) for a range of AI infrastructure projects has drawn attention. Amazon, with its robust $638 billion in revenue and 11% year-over-year growth, represents a significant opportunity for Fabrinet. Barclays highlighted the significance of this partnership, noting that Fabrinet is poised to benefit from hyperscale customers like AWS seeking to minimize their reliance on Chinese and Taiwanese suppliers due to tariffs and geopolitical concerns.Want deeper insights into Amazon’s financial health and growth prospects? InvestingPro analysis reveals 12 key investment tips and comprehensive metrics that could shape your investment decisions.

Fabrinet is expected to take on a larger share of the market as AWS moves away from suppliers such as Innolight, Eoptolink, and Accton in their AI infrastructure supply chains. The company is also looking to reduce its dependency on NVIDIA/Mellanox by designing its own optical modules, which would allow them to cut costs and avoid margin stacking. With its U.S.-based electronic manufacturing services (EMS), Fabrinet is in a strong position to assemble these modules and supply directly to hyperscalers in the future.

CEO Seamus Grady described the scope of the relationship with AWS as broad contract manufacturing work, without delving into specific product categories. Fabrinet aims to perform margin-accretive contract manufacturing for AWS, starting from the component level with high value adds. The company is also considering full-system assembly for AWS servers, provided it can supply a significant portion of the bill of materials to ensure profitability.

The ramp-up of AWS revenues for Fabrinet is expected to be steep compared to the gradual revenue increase from the company’s other telecom customers. Grady also pointed out the lower cost structure of Fabrinet’s Thailand facility, which is advantageous and tariff-free, allowing the company to compete effectively with suppliers that have manufacturing bases in Mexico.

Lastly, Grady mentioned Fabrinet’s significant available capacity, with $1.2 billion in terms of revenues, and plans to ramp up another $2.4 billion in revenue capacity, which should convert to revenues within 16 to 18 months. This expansion aligns well with Amazon’s strong market position, evidenced by its $2.03 trillion market capitalization and robust EBITDA of $120.5 billion. Fabrinet’s strategy of not selling its own products or intellectual property positions it well to provide contract manufacturing work for hyperscalers like AWS directly.Discover more detailed analysis and financial metrics with InvestingPro, including exclusive Fair Value calculations and comprehensive financial health scores that help you make informed investment decisions.

In other recent news, Amazon.com (NASDAQ:AMZN) received favorable legal news as a U.S. District Judge in Seattle dismissed a lawsuit accusing the company of misleading shareholders. The lawsuit alleged Amazon made false statements regarding its treatment of third-party sellers and capacity expansion plans, but the judge ruled the case lacked legal grounds. In another development, the U.S. Federal Trade Commission (FTC) confirmed it can meet the trial schedule for its consumer protection case against Amazon, reversing an earlier statement citing resource shortfalls. Additionally, Amazon has pledged to triple global nuclear energy capacity by 2050 alongside Google (NASDAQ:GOOGL) and other major companies, as announced at the CERAWeek conference. Meanwhile, Applied Optoelectronics (NASDAQ:AAOI) announced a significant warrant agreement with Amazon, allowing the e-commerce giant to acquire up to 7.95 million shares, highlighting Amazon’s commitment to the tech company’s offerings. This agreement was seen as a strategic move for Applied Optoelectronics, positioning it as a key player in the transceiver market for artificial intelligence applications. Lastly, Amazon remained relatively unchanged among the Magnificent Seven stocks, despite other chip stocks experiencing gains following Broadcom (NASDAQ:AVGO)’s optimistic forecast for AI computing.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.