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Why Fabrinet Stock Just Plummeted
Key Points
Fabrinet's Q4 results and forward guidance generally looked quite strong.
Investors are concerned about high capital expenditures eating into free cash flow.
Fabrinet (NYSE: FN) stock got hit with a big pullback in Tuesday's trading. The optical technologies specialist's share price fell 19.4% in a session that saw the S&P 500 decline 0.7% and the Nasdaq Composite decline 1.4%.
After the market closed yesterday, Fabrinet published results for the fourth quarter of its 2026 fiscal year -- which wrapped on June 26. The company posted fiscal Q4 results that exceeded Wall Street's targets, but investors weren't happy with management's forward guidance.
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Fabrinet had strong momentum last quarter, but it wasn't enough for investors
Fabrinet's fiscal Q4 report arrived with a substantial earnings beat and sales that also topped expectations. The company recorded non-GAAP (adjusted) earnings of $4.10 per share on sales of $1.32 billion in the quarter. Sales were up roughly 45% year over year and beat the average analyst target by $40 million, and adjusted earnings per share were up roughly 55% year over year to $4.10 and topped the average analyst estimate by approximately $0.29 per share. The company set new records for revenue and adjusted earnings in the quarter, but it wasn't enough to power gains for the stock.
Guidance looked encouraging, but there was a catch
In the current quarter, Fabrinet expects to record adjusted earnings per share between $4.10 and $4.25 on revenue between $1.375 billion and $1.425. The company's sales and earnings guidance came in well above the average analyst estimates, which had targeted adjusted earnings per share of roughly $3.99 on sales of roughly $1.32 billion.
While Fabrinet's adjusted gross margin declined to 12.2% in fiscal Q4 from 12.5% in the prior-year period, the company's recent quarterly report and forward guidance generally looked pretty solid. Unfortunately, the company's free cash flow (FCF) declined to -$36.9 million due to high capital expenditures last quarter and brought total FCF for the year down to roughly $4 million. So while the business is generating solid earnings, the company is funneling that money back into building out its infrastructure -- and investors sold out of the stock today due to concerns about how well the plan will play out over the long haul.
Keith Noonan has 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.