Proprietary Data Insights
Financial Pros Top Small Cap Semiconductor Stock Searches This Month
The Backdoor to the Metaverse
Semiconductor stocks have seen a wicked selloff lately.
Yet, we know demand remains robust even if supply struggles.
But we wanted to look past the majors for some small cap plays that might have gone under the radar.
One that came to our attention was a tiny company that’s been in the news lately as the Metaverse has become a popular investment theme.
In January 2022, a little-known company named Penguin Computing announced it was partnering with Meta (FB) to help them build the metaverse by delivering AI-optimized architecture and managed services.
Through the collaboration, Meta believes it will have one of the fastest AI supercomputers globally.
Penguin Computing also has strong relationships with NVIDIA and Pure Storage.
And while you can’t buy shares of Penguin Computing, you can purchase shares of its parent company, Smart Global Holdings (SGH).
But does that mean you should?
Check out our analysis below…
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Smart Global Holdings (SGH) Business
SGH designs and manufactures specialty solutions for the computing, memory, and LED markets in the U.S., Brazil, China, Europe, and internationally.
The firm operates via the following segments: Memory Solutions, Intelligent Platforms Solutions, and LED Solutions.
Memory Solutions pulled in revenue of $260.1 million in Q2, the most out of the divisions. Sales of core DDR3 and DDR4 have driven growth, and Flash products for networking, telecom, and storage end markets.
LED Solutions did $106.8 million, a decline from Q1 of FY22.
The intelligent platform solutions saw revenue declines YOY and QOQ for Q2 of FY’22.
Within the company, it runs three major brands: Penguin Solutions, SMART Modular Technologies, and Cree LED.
Penguin Computing is a leader in high-performance computing focused on artificial intelligence and machine learning is, providing AI-optimized architecture and managed services to Meta’s (FB) cutting-edge AI supercomputer for AI research.
SMART Modular Technologies focuses on memory including DRAM and Flash solutions.
Cree LED supports various LED products and accessories.
SGH draws its sales from a number of different places.
SGH experienced a nice pop in revenues in 2021, the best ever for the firm, jumping to $1.5 billion compared to 2020, which was $1.1 billion.
Furthermore, the company increased its gross margin from 19.3% in 2020 to 20.5% in 2021, expanding even further to 24.0% for the trailing 12 months.
SGH reported an operating margin of 5.8% in 2021, which was an improvement over 2020s 4.0%
In 2021 SGH had a current ratio of 1.63x, which means its assets were 1.63X greater than its short-term liabilities.
Furthermore, SGH in 2021 had a quick ratio of .92X, which means its highly liquid assets were not enough to cover its short-term liabilities.
The capital structure for SGH is as follows: total debt of $517.38 million and cash upwards of $365 million, and a market cap of approximately $1.13 billion.
We like the consistent growth of both operating and free cash flow over time as well.
SGH has a price-to-sales ratio of 0.64x, which is significantly better than the sector median of 2.98x and fantastic when you consider the 5-year average revenue growth of 22.94%.
Now, the GAAP P/E ratio of 36.24x, greater than the sector median of 24.88x. However, both the trailing 12 months and forward non-GAAP P/E ratios run a paltry 6.39x and 6.73x, making it incredibly cheap overall.
Plus, the price to cash flow trailing is 8.19x with the forward look at 8.94x. Even with the erosion, it’s still healthy and less than half the sector average.
Our Opinion – 9/10
It has been a brutal year for semiconductor stocks and tech. SGH has a diversified stream of revenue and significant partnerships like the one with Meta.
Yet, the stock is trading at an incredible discount both in terms of non-GAAP earnings and cash flow.
Assuming this performance holds up, which we see no reason they would not, we like this stock over the next 12-18 months.
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