Market Commentary: Hot Semi Stock with 38.6% Upside
Semiconductor stocks have been especially popular this year due to their role in the emerging AI industry, and SMART Global Holdings (SGH) stock is no exception. The company produces computing platform solutions, computer memory solutions, and LED chips and components through multiple brands.
The increased interest in SGH has driven shares up over 73% over the past 5 years. Even when other tech stocks have struggled, SMART Global has continued to push forward. It’s up nearly 79% year-to-date.
The association with AI and cloud computing has caused bullish analysts to estimate that earnings could increase by over 110% for the company over the next 12 months. Some believe the positive trend has already started, as SGH beat earnings estimates for the first quarter of 2023 by 2%. The stock soared nearly 10% on the news.
But not all recent news has been positive. Despite the earnings beat, SMART Global’s net sales were down compared to the first quarter of 2022. And the company isn’t currently profitable. So what does the future hold, is it a buy or a sell?
Lucrative Acquisition Paves Way For Growth
The company’s initial focus on computer storage and memory changed as SGH acquired other brands. One of the most important purchases was the acquisition of the Penguin Computing brand in 2018, which established the company’s Intelligent Platform Solutions (IPS) business.
The most recent acquisition was the 2022 purchase of Stratus Technologies, and the $225 million purchase further strengthened SMART Global’s IPS platform. But the most important recent news wasn’t an acquisition, it was the divestiture of 81% of the company’s SMART Brazil business for $166 million.
The June announcement was viewed positively by investors who believed the Brazilian business unit wasn’t in line with the company’s future goals. Divesting SMART Brazil will allow SGH to devote more of its time and capital to developing AI and cloud computing solutions.
AI Solutions Are Growth Lever
SMART Global operates through three business segments: Intelligent Platform Solutions, Memory Solutions, and LED Solutions.
The IPS segment creates and maintains platforms for AI, machine learning, high-performance computing, and more. The company’s brands in this segment include Penguin Solutions and Stratus. This segment accounted for 44% of the company’s $383.3 million in net sales in the first quarter of 2023.
The Memory Solutions segment accounted for $148.4 million, or 39% of the company’s first-quarter net sales. It includes the SMART Modular Technology brand, which makes DRAM and flash storage devices for new and legacy devices.
The LED Solutions segment accounted for 17%, or $64,106, of SMART Global’s net sales in the first quarter. This segment manufactures LED components and chips for applications in lighting and video screens. LED Solutions operates through the Cree LED brand, a product line that was acquired in 2021.
Sales and Profitability Results
In the first quarter, the company’s net sales of $383.3 million were down 17.1% from $462.5 million in the same quarter in 2022. Net sales also declined over 10% from $429.2 million last quarter. Despite decreasing sales, SMART Global’s GAAP gross margin was up 1% year-over-year to 25.7%.
The company has struggled to maintain profitability. SGH dropped from net income of $24.1 million in the first quarter of 2022 to a net loss of $24.5 million in the first quarter of this year. The quarter’s net loss was a slight increase from the net loss of $27.2 million in the final quarter of 2022.
The net loss means that the company’s GAAP earnings per share were negative, compared to a positive GAAP EPS of $0.44 in the first quarter of 2022. But in spite of recent quarterly losses, the company still has $401 million in cash and equivalents to keep operations afloat.
The recent trend makes it harder to gauge SGH’s valuation, but the company currently has a P/S ratio of 0.81, which is a healthy indicator for the company. Compared to the industry and market as a whole, SMART Global looks to be undervalued.
Analysts’ Ratings for SMART Global
Due to the company’s potential in the AI industry, the majority of analysts are bullish on SGH. All 6 analysts have the stock as a buy, with one analyst forecasting the stock will outperform the market and reach $37 over the next 12 months. That would be a 36.8% gain from where the stock currently trades.
The median forecast puts the stock at $33 after the next 52 weeks, which would be a 22% gain. The lowest forecast for SGH still predicts the stock will increase 11% over the next year to $30 per share.
Is SMART Global Stock a Buy?
SMART Global is a semiconductor company that makes computing components, memory solutions, and LED solutions for a variety of industries. The company’s net sales have declined from last year and last quarter, and SGH isn’t currently profitable despite a strong presence in the industry.
But investors and analysts alike clearly believe in the company’s potential to be a player in the booming AI industry. SMART Global’s first-quarter earnings beat estimates, which is confirmation for bulls who expect the company to break out soon. And a low P/S value is an indication that the stock is undervalued at its current price point.
SGH stock has risen over the past few years, and that positive trend is likely to continue over 2023. Investors looking to get in on the ground floor of the AI industry could consider taking a position in SMART Global on a pullback.
