Wolfe Research on Thursday upgraded Fabrinet to an Outperform rating, saying the optical manufacturing specialist is well-positioned to benefit from accelerating data-center demand amid persistent supply bottlenecks across the optics ecosystem.
In its note, the brokerage described a market where customers are urgently seeking to diversify and scale their supply chains, yet are constrained by the pace at which new capacity can be brought online. Wolfe framed that dynamic as advantageous to Fabrinet, arguing that more outsourcing work is likely to flow to the company than previously anticipated.
The firm also addressed Fabrinet's recent share price action, calling a roughly 10% decline in the stock over the latest period an overreaction. Wolfe judged the company's most recent quarterly results and forward commentary to be solid and said investor concerns about transceiver growth and data-center interconnects have been misplaced.
Wolfe clarified two points it believes investors should treat differently: first, near-term transceiver revenue is curtailed by limitations in EML supply rather than demand exhaustion; second, data-center interconnect activity should be interpreted within Fabrinet's broader telecom business rather than as a separate, isolated risk.
The brokerage urged market participants to pay closer attention to Fabrinet's announced capacity additions, describing those expansion plans as a more direct signal of the firm's ability to convert demand into higher revenue over time. Wolfe stated that these capacity investments point to materially larger sales potential as the new manufacturing ability comes online.
Wolfe also highlighted a possible incremental opportunity tied to Lumentum. Based on recent comments from Lumentum, the firm expects the optical-component and systems maker to increase outsourcing of manufacturing. Given Lumentum's anticipated rapid growth, Wolfe suggested Fabrinet could capture a meaningful share of that outsourced volume.
Reflecting its view on Fabrinet's long-term earnings trajectory and competitive position in optical manufacturing, Wolfe raised its price target to $540. The brokerage said the company's standing in the supply chain supports sustained growth if the demand and capacity dynamics play out as described.
Impacted sectors: Data-center infrastructure, optical manufacturing, telecom equipment supply chains.