Fabrinet (NYSE:FN) is quietly becoming a crucial player in the AI industry.

What Happened: This original equipment manufacturer (OEM) is catching investor attention thanks to its strategic partnership with Nvidia Corp (NASDAQ:NVDA).

Fabrinet, based in the Cayman Islands, is known for its state-of-the-art optical connections and networking cables. It recently became a vital partner within Nvidia's data center operations.

With AI applications demanding increasingly high data rates, Fabrinet’s role in producing cutting-edge optical communication products has become indispensable. Datacom revenues, 42% of Fabrinet’s quarterly sales, surged by 150% year-over-year. This illustrates the significant impact of the Nvidia partnership on Fabrinet’s bottom line.

Risks: Nvidia, a significant customer, is moving towards copper-based solutions for its latest GPUs.

Nvidia’s recent transition could impact Fabrinet’s core business — providing optical communication products.

Such a shift may reduce the demand for Fabrinet's high-precision optical components, potentially affecting its revenue streams from the data center segment.

While Fabrinet’s diversified portfolio and strong foothold in the AI sector provide a buffer, any substantial decrease in orders from Nvidia could put pressure on the company’s growth trajectory and financial performance.

Read Also: Here’s How Much You Would Have Made Owning Fabrinet Stock In The Last 10 Years

Why It Matters: So far, Fabrinet's financial trajectory has been nothing short of impressive. The company’s revenues have expanded from $700 million in 2014 to $2.8 billion today.

Despite operating with relatively thin gross margins, Fabrinet has maintained healthy operating margins of about 10%.

Stock performance is equally noteworthy. Shares soared over 80% this past year, a feat that outpaces both the broader market and the tech sector. The broad market S&P 500 index has gained just over 19% and the tech sector tracking Nasdaq-100 has gained just over 23%, in the past year.

This stellar rise has made Fabrinet a darling of small-cap ETFs, including the iShares Core S&P Small-Cap ETF (NYSE:IJR) and the iShares Russell 2000 ETF (NYSE:IWM) where it ranks as a top holding.

Why Investors Should Watch Fabrinet

Fabrinet is more than a manufacturing giant; it's an under-the-radar AI play with significant growth potential. As the company continues to ride the AI wave, its partnership with Nvidia offers a compelling growth narrative that positions Fabrinet as a key player in the AI and data center arenas.

Investors looking for exposure to AI-driven growth should keep a keen eye on this emerging powerhouse.

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