Fabrinet (FN) shares plummeted 8.90% in pre-market trading on Tuesday, despite the optical manufacturing specialist reporting better-than-expected fourth-quarter results for fiscal year 2025. The sharp decline suggests investors are looking beyond the headline numbers and focusing on concerns about future growth and cash flow generation.

For the fourth quarter ended June 27, 2025, Fabrinet reported revenue of $909.69 million, up 20.8% year-over-year and beating estimates of $884.87 million. Adjusted earnings per share came in at $2.65, slightly above the expected $2.64. However, several factors appear to be weighing on investor sentiment:

1. Free cash flow decline: Non-GAAP free cash flow dropped dramatically to $4.7 million, down from $70.4 million a year ago, primarily due to increased capital spending and inventory growth. This significant decrease, despite strong revenue growth, has raised questions about the company's capital efficiency and future investment needs.

2. Margin pressures: The company noted that startup costs and new program ramps created cost pressures, which could persist in the near term. This has led to concerns about potential margin compression as Fabrinet continues to expand.

3. Guidance concerns: For Q1 fiscal 2026, Fabrinet projects revenue of $910-950 million and adjusted EPS of $2.75-$2.90. While generally in line with expectations, some investors may have hoped for more robust growth given the company's recent performance.

4. Supply constraints: The company highlighted temporary supply constraints for some critical components, particularly affecting its Datacom revenue. This issue is expected to impact near-term performance, although management believes it will be resolved within one or two quarters.

Despite these concerns, Fabrinet CEO Seamus Grady remained optimistic, stating, "We're encouraged by the growing demand across all areas of our business and remain optimistic that these favorable trends will carry into the first quarter and beyond." However, the market's reaction suggests that investors are taking a more cautious view on the company's near-term prospects as it navigates challenges related to growth sustainability and operational efficiency.