Fabrinet (FN): Among the Worst Performing AI Stocks of Previous Week

Fatima Farooq

Sat, Sep 14, 2024, 9:40 AM 6 min read

US Stocks in September

This September saw a sluggish start for most US stocks, and large-cap technology stocks were no exception to this trend. The main driving factors for this development include concerns over the health of the American economy resurfacing, particularly in light of the August jobs report. The report underscored the labor market's weakness in the US, which has not left investors feeling all that secure about the state of the economy.

On the stock side, many investor favorites in the artificial intelligence (AI) space have been doing poorly so far in September, with losses ranging from around 4% to even over 20% for the first week of September. The primary reason for this decline seems to be that investors are just not satisfied with the growth demonstrated by major AI companies at present. While growth is definitely present, it's continuing to fall short of investor expectations, which have increased exponentially in light of the hype cycle created around AI stocks.

Are We Really In An AI Bubble?

The first week of September was actually the worst week for chip stocks recorded in over two years. Many investors are now beginning to wonder whether AI is worth the amount of money being poured into it, resulting in corporate spending on AI coming under greater scrutiny than ever before. The greater scrutiny is predominantly because of investors and analysts now thinking that many AI stocks are overhyped and overvalued and don't have the means to justify this hype and valuation - essentially, the main concern is that we're in an AI bubble that's on the brink of bursting.

However, as with any high-tension market situation, there are diverging opinions as well. In his September 6 interview on CNBC's "Closing Bell Overtime," Deepwater Asset Management's managing partner, Gene Munster, emphatically stated that we are not in an AI bubble. For him, the bigger problem in the AI space is that every other company today is trying to talk about AI and say that it's working towards AI incorporation in its operations - something that's leading to a lot of noise in the market, which is drowning out the voices of companies offering real substance in this space. He thus noted that it's important for investors to be careful not to invest in just any company that says it's working with AI and instead to focus on the better, perhaps more boring, options in the market.

According to Munster, the main players to keep your money in are predominantly big tech names, as these are the only companies that are poised to deliver substantial growth instead of just generating noise. However, investors are still confused about whether AI is a good place to invest in even today, which is why we've compiled a list of the worst performing AI stocks in September so far and explained whether these stocks are worth picking up or if they're just temporary beneficiaries of the hype around AI.

Our Methodology

We compiled our list by screening for AI stocks that have seen declines of 10% or above in the first week of September, and then ranked the stocks based on their weekly decline as of Friday, September 6. We have also mentioned the number of hedge funds holding stakes in each stock.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

An automated assembly line displaying the advanced packaging technology used by the company.

Fabrinet (NYSE:FN)

Weekly Decline: 13.87%

Number of Hedge Fund Holders: 31

Fabrinet (NYSE:FN) is an electronic manufacturing services company based in George Town, Cayman Islands. It provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services.

Fabrinet (NYSE:FN) had been performing pretty well until September began, primarily because of the company's stellar results in the fiscal fourth quarter of 2024. The quarter's results went well beyond average analyst estimates, bringing in revenue of $753 million, up 15% year-over-year, and non-GAAP (adjusted) net income of $88 million, up 29% year-over-year. In contrast, analysts only expected revenue of $733 million on the top line.

This quarter was Fabrinet's (NYSE:FN) fourth in a row in which the company generated record revenues and EPS figures. The company has also mentioned that it will be expanding its existing stock buyback program, with the new authorization encompassing $139.5 million worth of ordinary shares. This represents a significant opportunity for shareholder value returns and also highlights Fabrinet (NYSE:FN) management's confidence in its growth potential.

Despite this, since Fabrinet (NYSE:FN) sees a lot of its revenue come in from new AI products in datacom, the current negative news surrounding AI stocks may be responsible for bringing the stock down. However, since the company has proved in fiscal 2024 that it's on an impressive growth trajectory, it would be ill-advised to entirely ignore this AI player.

We saw 31 hedge funds holding stakes in Fabrinet (NYSE:FN) in the second quarter, with a total stake value of $575.7 million.

First Pacific Advisors mentioned Fabrinet (NYSE:FN) in its second-quarter 2024 investor letter:

“Fabrinet (NYSE:FN) is a contract manufacturer of optical communications components and modules. The company has a dominant position in hard-to-replicate precision-manufacturing technologies and an enviable track record of execution. The majority of Fabrinet’s sales are to networking equipment manufacturers, but it has been successfully diversifying into the data center, industrial, auto, and medical end-markets. FN’s stock jumped after reporting June 2023 earnings – datacenter sales increased 50% sequentially and more than 100% over the previous year, driven by their 800-gigabyte transceivers for Artificial Intelligence applications. The company also announced that Nvidia is a 10%+ customer.

Overall FN ranks 8th on our list of the worst performing AI stocks last week. While we acknowledge the potential of FN as an investment, we believe that AI stocks hold promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.