J P M O R G A N North America Equity Research 18 March 2026 Hardware & Networking OFC Insights: CIEN, CSCO, COHR, FN, & LITE Meeting Takeaways The second day of the Optical Fiber Communication (OFC) Conference had us attending presentations and discussion sessions with Ciena, Cisco, Coherent, Fabrinet, and Lumentum, all of which served to highlight a combination of new growth opportunities being actively pursued across the group as well as continued robust growth in existing product lines, setting the secto ...

Key Takeaways Fabrinet posted record $1.13B revenues in Q2 FY26, driven by strong optical and telecom growth.AAOI is ramping 800G transceivers but rising operating expenses pressure weigh on near-term outlook.FN trades at 3.52X forward sales vs AAOI's 5.80X, offering better valuation appeal.Fabrinet (FN) and Applied Optoelectronics Inc. (AAOI) both operate in the optical networking and communications space. While Fabrinet provides advanced optical packaging and precision optical, electro-mechanical and elec ...

Fabrinet (NYSE: FN) 2026 Conference Summary Company Overview - **Company**: Fabrinet - **Industry**: Contract Manufacturing in Optical Components - **Event**: Investor Q&A session at OFC 2026 - **Date**: March 17, 2026 Key Points Growth and Financial Performance - Fabrinet reported a **36% year-over-year growth rate** in the last quarter, with a **compound annual growth rate of 16%** over the past ten years [3][5] - For FY25, the company achieved a **19% growth**, and guidance for the current quarter indicates a **35% growth** at the midpoint [5] - The telecom business saw a **59% increase** year-over-year, driven by strong demand in Data Center Interconnect (DCI) and high-performance computing (HPC) [6][8] Business Segments and Drivers - **Telecom Business**: Major growth driver, particularly in DCI, which is primarily supported by 400ZR and 800ZR technologies [9][10] - **High-Performance Computing (HPC)**: New category for Fabrinet, with revenue growing from **$15 million in Q1 to $86 million in Q2** [6][10] - **Datacom Business**: Flat revenue due to supply constraints, but demand remains strong [7][8] Capacity and Expansion Plans - Current run rate is approximately **$4.6-$4.8 billion**, with a capacity of **$5.5 billion** [37] - New facility in Chonburi, Building 10, will add **$3 billion** in capacity, bringing total capacity to **$8.5 billion** [38] - Future plans include the potential for two additional factories, each with a capacity of **$1.5 billion**, leading to a total capacity of **$11.5 billion** [38] Customer Relationships and Market Position - Fabrinet operates as a **pure play contract manufacturer**, focusing on supporting leading companies without entering the product market [14][16] - The company has established strong relationships with major customers, including AWS, and is positioned to capture significant market share in emerging technologies like Co-packaged Optics (CPO) and Optical Circuit Switching (OCS) [16][49] - Customers are providing multi-year visibility into demand, allowing Fabrinet to align capacity with future needs [8][81] Supply Chain and Operational Efficiency - The company is experiencing supply chain constraints, particularly with EML components, but improvements are expected as new sources are approved [74] - Fabrinet maintains a low operational expenditure (OpEx) of **1.5% of revenue**, which is significantly lower than industry standards [84] - The company emphasizes flexibility in operations, allowing customers to adjust their needs without financial penalties [97] Competitive Landscape - Fabrinet's unique capabilities in packaging and manufacturing processes set it apart from competitors, with **70% of manufacturing space dedicated to clean room operations** [23] - The company is well-positioned to capitalize on the growing demand for optical components driven by hyperscalers and the overall expansion of data centers [105] Future Outlook - The demand for optical components is expected to remain robust, with significant growth opportunities in DCI, HPC, and emerging technologies [106] - Fabrinet's strategy focuses on maintaining competitive pricing while ensuring high-quality service and execution for customers [32][86] Additional Insights - The company is cautious about potential risks and emphasizes the importance of execution in maintaining customer satisfaction and business growth [85] - Fabrinet's relationship with Lumentum is strong, with potential for further collaboration in the OCS market [69] This summary encapsulates the key insights and strategic directions discussed during the Fabrinet conference, highlighting the company's growth trajectory, market positioning, and operational strategies.

Core Insights - Fabrinet (FN) is experiencing significant growth in its high-performance computing (HPC) business, with revenues reaching $86 million in Q2 FY26, a remarkable sequential increase of 473.3% from $15 million in the previous quarter [1][10] Group 1: HPC Business Growth - The HPC segment has substantially contributed to the non-optical communications segment, which generated $300 million in revenues, marking a 61% year-over-year increase and a 30% sequential increase [2] - Management anticipates continued growth in the HPC business as AI infrastructure spending rises, with expectations of generating over $150 million in revenues once the current HPC program is fully ramped [3][4] Group 2: Production and Capacity - Fabrinet is currently operating two fully automated production lines for its HPC program, with additional lines being qualified, and is slightly more than halfway through the ramp-up process [3] - The company expects to reach the projected revenue level of over $150 million in the coming quarters as production capacity increases [3] Group 3: Competitive Landscape - Fabrinet faces competition from Coherent Corporation and Lumentum Holdings in the HPC and advanced optical manufacturing sectors [5] - Coherent has launched the Thermadite 800 liquid cold plates for cooling AI accelerators and HPC systems, which offer superior thermal conductivity compared to conventional solutions [6] - Lumentum provides essential components for high-speed data movement in HPC and AI data centers, including lasers and optical modules [7] Group 4: Financial Performance and Valuation - Fabrinet's shares have increased by 36% over the past six months, outperforming the Zacks Electronics - Miscellaneous Components industry's growth of 4.9% [8] - The forward 12-month price-to-sales (P/S) multiple for Fabrinet is 3.57X, which is higher than the industry average of 2.26X, indicating that the shares may be overvalued [12] - The Zacks Consensus Estimate for Fabrinet's fiscal 2026 earnings is $13.58 per share, reflecting a year-over-year increase of 33.5% [15]

Core Insights - iPronics is expanding its global manufacturing capabilities through a partnership with Fabrinet, focusing on programmable silicon photonics for AI datacenter networking [1][4]. Group 1: Manufacturing Expansion - iPronics is launching a dedicated manufacturing line for the packaging, assembly, testing, and qualification of its ONE Series SiPh optical circuit switch (OCS), expected to be operational by Q2 2026 [3][7]. - The new manufacturing line will enable rapid scaling of production to meet the increasing demand for SiPh OCS in AI infrastructure, particularly for training and inference AI clusters [5][6]. Group 2: Market Demand and Growth - The market for silicon photonics OCS is projected to reach a multibillion-dollar size by 2030, driven by the need for scalable and energy-efficient interconnects in AI workloads [5]. - iPronics anticipates significant growth in demand for OCS units as AI clusters evolve, necessitating advanced networking solutions beyond traditional copper and electronic packet switching [4][6]. Group 3: Strategic Partnerships - The partnership with Fabrinet enhances iPronics' manufacturing robustness and scalability, aligning with the expectations of Tier 1 customers in the industry [6][7]. - This collaboration builds on an established relationship focused on optical sub-assemblies, further solidifying iPronics' position in the programmable photonic hardware market [4][6].

Core Insights - Fabrinet has experienced stock volatility due to the U.S.-Iran conflict but has found support at critical levels after reaching an all-time high [1] - The company reported strong fiscal second-quarter results, with earnings of $3.36 per share, a 29% year-over-year increase, and revenue of $1.13 billion, up 36% from the previous year [1] - The growth was driven by significant demand in the telecom and high-performance computing segments, particularly for optical communication products [1] Financial Performance - Fabrinet's earnings growth accelerated for the third consecutive quarter, surpassing the company's three-year sales growth rate of 15% [1] - High-performance computing (HPC) revenue surged from $15.4 million in the first quarter to $85.6 million in the second quarter, with expectations to exceed $150 million when fully ramped [1] - Wall Street anticipates earnings of $3.54 per share and revenue of nearly $1.2 billion for the current quarter, projecting a 41% increase in earnings year-over-year and a 36% rise in sales [1] Market Position - Fabrinet stock has a perfect 99 Composite Rating, indicating exceptional performance compared to 99% of companies [1] - The company holds the top rank in the electrical contract manufacturing industry group, outperforming peers like Celestica, TTM Technologies, and Jabil [1] - The industry group ranks 44th out of 197 tracked by IBD, suggesting strong potential for growth among top-ranked stocks [1] Stock Performance - Fabrinet stock broke out past a buy point of 531.22, rallying 19% before experiencing a pullback due to market volatility [1] - The stock regained its 50-day moving average, a key support level, and its relative strength line reached a new high, confirming its status as a market leader [1] - The stock has a 21-day average true range (ATR) of 7.49%, indicating high volatility [1]

Core Insights - Fabrinet (FN) shares have increased by 9.2% over the past three months, outperforming the Electronics - Miscellaneous Components industry's growth of 2.5% and the broader Computer and Technology sector's decline of 0.6% [1] Financial Performance - Fabrinet reported strong second-quarter fiscal 2026 results with non-GAAP earnings of $3.36 per share, exceeding the Zacks Consensus Estimate by 3.07%. Revenues reached $1.13 billion, surpassing the consensus mark by 5.03%, and increased by 36% year over year and 16% sequentially [2] - The optical communications business generated revenues of $833 million, a 29% year-over-year increase and an 11% sequential increase, making it the largest contributor to total revenues [7] - Telecom revenues surged 59% year over year to $554 million, while data center interconnect revenues rose 42% to $142 million, driven by strong demand for coherent optical modules [8][9] - Datacom revenues totaled $278 million, increasing 2% sequentially, with expectations for continued growth due to strong demand for high-speed transceivers [10] - The HPC business generated revenues of $86 million, reflecting a sequential increase of 473.3%, driven by strong demand from hyperscale customers [14] Market Outlook - Management anticipates strong growth in telecom and datacom markets for the third quarter of fiscal 2026, supported by demand for optical products [11] - The Zacks Consensus Estimate indicates a year-over-year revenue increase of approximately 33.1% for fiscal 2026 and 18.5% for fiscal 2027 [11] Valuation - Fabrinet is currently trading at a forward price-to-sales (P/S) ratio of 3.58X, which is below the sector's average of 6.21X and lower than peers such as nVent Electric (3.82X), American Superconductor (3.99X), and Universal Display (6.33X) [18][21] Investment Recommendation - The company is benefiting from strong demand in its optical communications and HPC businesses, which are driving overall revenue growth. The reasonable valuation offers downside protection, making the stock an attractive buy for investors seeking stability and steady upside [22][23]

Core Insights - Fabrinet (FN) is experiencing significant growth in its optical communications business, contributing to overall revenue growth, with optical communications revenues reaching $833 million, a 29% year-over-year increase and an 11% sequential increase in Q2 FY26 [1][10] - The total revenues for Fabrinet reached a record $1.13 billion for the quarter, driven primarily by the optical communications segment [1] Optical Communications Growth - The telecom sector was the primary driver of optical communications growth, with telecom revenues increasing 59% year-over-year to $554 million and 17% sequentially, supported by strong demand from multiple customers [2] - Revenues from data center interconnect products reached $142 million, marking a 42% year-over-year increase, driven by rising shipments of coherent optical modules, particularly 400ZR and 800ZR modules [2][10] Datacom Performance - Datacom revenues totaled $278 million, reflecting a 2% sequential increase, with expectations for continued growth due to strong demand for high-speed transceivers used in large data center networks [3] Future Outlook - Fabrinet anticipates sequential growth in telecom and datacom markets in Q3 FY26, supported by strong demand for optical products in telecom and data center networks [4] - The Zacks Consensus Estimate projects a year-over-year revenue increase of approximately 33.1% for fiscal 2026 and 18.5% for fiscal 2027 [4] Competitive Landscape - Fabrinet faces competition from companies like Lumentum (LITE) and Coherent (COHR) in the optical communications market [5] - Coherent and NVIDIA have entered a multi-year strategic agreement to develop advanced optical technologies for AI data centers, with NVIDIA committing to a multibillion-dollar purchase and investing $2 billion in Coherent [6] - Lumentum has also formed a similar partnership with NVIDIA, which includes a multibillion-dollar purchase commitment and a $2 billion investment to enhance R&D and manufacturing capabilities [7] Stock Performance and Valuation - Fabrinet's shares have increased by 46% over the past six months, outperforming the Zacks Electronics - Miscellaneous Components industry's growth of 11.6% [8] - The current forward 12-month price-to-sales (P/S) multiple for Fabrinet is 3.79X, which is higher than the industry average of 2.32X, indicating that the shares may be overvalued [12] - The Zacks Consensus Estimate for Fabrinet's fiscal 2026 earnings is $13.58 per share, reflecting a 33.5% year-over-year increase [15]

Summary of Key Points from the Conference Call Industry Overview - The focus is on the optical transceiver industry, particularly companies like Lumentum, Coherent, Ciena, and Corning, as well as the broader implications of optical and copper interconnect technologies [1][2][3][6][12]. Core Insights and Arguments 1. **Market Sentiment Shift**: The bearish outlook on optical transceiver companies has reversed, with a +50% average increase in share prices attributed to rising demand and confidence in supply chain capabilities [1]. 2. **Growth Drivers**: Key growth drivers include: - Nvidia's emphasis on scale-up optics for enhanced compute performance [1]. - Increased Total Addressable Market (TAM) expectations for Optical Circuit Switching (OCS) [1][28]. - Optical companies' improved visibility into component supply, enabling them to meet rising demand [1]. - A resurgence in growth expectations for telecom products, particularly in Data Center Interconnect (DCI) and ZR pluggables [1]. 3. **Valuation Divergence**: Despite robust growth prospects for optical companies, valuation multiples have diverged, making copper interconnect companies potentially more attractive in the short term [2]. 4. **Lumentum's Ambitious Targets**: Lumentum aims to double its revenue to $8-9 billion within 12-18 months, targeting a 40% operating margin, which could lead to earnings power of ~$25 per share [3][34][40]. 5. **CPO Market Growth**: The CPO market is expected to grow significantly, from <$500 million in 2027 to ~$10 billion by 2030, driven primarily by scale-up use cases [8][12]. 6. **OCS Market Inflection**: The OCS market forecast has increased from $1-2 billion to over $4 billion, indicating a broadening customer base beyond Google [18][19]. Additional Important Insights 1. **Copper Interconnects**: Investors are expected to focus on the adoption of optical solutions for intra-rack scaling and the potential for copper interconnects to recover due to better-than-expected demand [2][16]. 2. **Role of Contract Manufacturers**: The role of contract manufacturers in the CPO supply chain will be scrutinized, especially regarding their capabilities in silicon and indium phosphide fabs [15]. 3. **Ciena's New Solutions**: Ciena is focusing on new products like the Vesta 200 optical engine and is expected to balance pricing and gross margin outcomes amid supply constraints [44][45]. 4. **Corning's Portfolio**: Corning will showcase its optical portfolio and is expected to discuss its ability to price for innovation and capture upside in a supply-constrained environment [46]. 5. **Fabrinet's Demand Drivers**: Fabrinet's focus will be on demand drivers from key customers like Ciena and Nvidia, with expectations for significant revenue contributions from new builds [43]. Conclusion The optical transceiver industry is experiencing a significant shift in market sentiment, driven by robust growth expectations and strategic developments from key players. Companies like Lumentum and Coherent are positioned to capitalize on these trends, while the copper interconnect market may also see renewed interest due to valuation divergences. Investors are advised to monitor these developments closely as they could impact investment strategies in the sector.

Core Insights - Fabrinet's shares have increased by approximately 23.3% since the last earnings report, outperforming the S&P 500 index Financial Performance - Fabrinet reported strong second-quarter fiscal 2026 non-GAAP earnings of $3.36 per share, exceeding the Zacks Consensus Estimate by 3.07% [2] - Revenues reached $1.13 billion, surpassing the consensus mark by 5.03%, reflecting a 36% year-over-year increase and a 16% sequential growth [2] Segment Performance - Optical communications revenues were $832.6 million, a 29% year-over-year increase, driven by Telecom revenues of $412.2 million (up 66.2% year over year) and DCI modules of $142.2 million (up 42.1% year over year) [3] - Datacom revenues were $278.1 million, down 7% year over year but improved by 2% sequentially due to easing supply constraints [3] - Non-optical revenues surged 61% year over year to $300.3 million, supported by HPC revenues of $85.6 million and growth in Automotive (up more than 12.2% year over year) and Industrial Lasers (up more than 10.4% year over year) [4] Operating Details - GAAP gross margin expanded by 10 basis points to 12.2%, while non-GAAP gross margin remained unchanged at 12.4% year over year [5] - Non-GAAP operating margin increased by 30 basis points to 10.9% year over year [5] Balance Sheet and Capital Allocation - As of December 26, 2025, Fabrinet had cash, cash equivalents, and short-term investments totaling $961.5 million, with no debt on the balance sheet [6] - Cash flow from operating activities for the reported quarter was $46.3 million, down from $102.6 million in the previous quarter [6] Capital Expenditures and Growth Initiatives - Capital expenditures in the second quarter of fiscal 2026 reached $52 million, with first-half spending totaling $96.9 million, indicating accelerated capacity expansion [7] - The Pinehurst campus conversion is underway, expected to support over $150 million of annual revenue capacity [8] Guidance - For the third quarter of fiscal 2026, Fabrinet guided revenue between $1.15 billion and $1.20 billion, indicating a midpoint growth of approximately 35% year over year, with non-GAAP earnings projected between $3.45 and $3.60 per share [11] Market Sentiment - Estimates for Fabrinet have trended upward, with a consensus estimate shift of 5.17% in the past month [12] - Fabrinet holds a Zacks Rank 2 (Buy), indicating expectations for above-average returns in the coming months [14]