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SGH Is A Smart Buy

Wednesday, October 13, 2021 | Thomas Hughes
SGH Is A Smart Buy

Rising Demand Drives Record Results For SGH

SGH’s (NASDAQ: SGH) fiscal fourth-quarter earnings report is already proving an investment thesis we've only just begun to form. Apple shocked the market when it lowered its target for iPhone production due to the microchip shortage. Our response to that was “too bad for Apple but great for the microchip companies and the microchip supply chain” of which SGH is integral. Manufacturers like Apple are struggling to make their products because of the shortage of microchips but the microchip makers and the microchip supply chain is functioning at max Capacity and trying to expand to meet the high demand. That's good for them and good for investors. 

“Fiscal 2021 has been a transformative year for SGH. We are proud of the team’s many accomplishments across each of our lines of business, Intelligent Platform Solutions, Memory Solutions, and LED solutions,” commented SGH CEO Mark Adams. “As we enter fiscal 2022, we believe we have the right platform to continue to execute our growth and diversification strategy while increasing value for our stakeholders.”

Cree Light’s The Way For SGH

SGH had a great quarter even discounting the addition of Cree to the portfolio. The company reported $467.70 million which is up 57.5% from last year and set a company record. The revenue beat the consensus by 140 basis points driven by strength in all segments not just LED. The company's core memory segment grew by 7.4% over last year while the intelligent platforms segment grew by 46% over last year. Cree, which was incorporated into the fold during the past year, saw its revenue grow 20% on a sequential basis to account for 26% of the net revenue.

Moving down the report, the company is experiencing significant margin expansion driven by internal efforts coupled with cost synergies and revenue leverage. On a GAAP basis, the company's gross margin widened 620 basis points to 25.2% while on an adjusted basis margin widened by 690 basis points to 26.4%. In either case, revenue strength and earnings leverage drove strong earnings on both the GAAP and adjusted basis. GAAP earnings of $0.78 are up 160% from last year while the adjusted earnings of $2.16 grew by 163% and beat the consensus estimate by $0.56.

Turning to guidance, the company issued favorable guidance and we see some upside risk in the numbers. SGH is expecting Q1 revenue in a range of $440 to $480 versus the consensus of $457 and we see revenue coming in at the high end of the range if not above. Gross margins are expected to hold Steady as well, and to drive adjusted earnings of $2.00 +/- $0.20 versus the consensus for $1.49.

The Analysts Are Bullish On SGH

The Marketbeat.com consensus analyst rating on SGH was bullish before the earnings release and has gotten more bullish in the wake of the report. At least two sell-side analysts have come out with bullish commentary and increased their price targets to a consensus of $77.50. This includes the new high price target of $85 and compares to the broad Marketbeat.com consensus estimate of only $68. The $68 broad-market estimate alone implies more than 41% upside for the stock even with today's pre-market pop.

The Technical Outlook: SGH Moves Up On Short-Covering

Shares of SGH are up more than 10% in pre-market trading on the heels of the strong report and outlook. The move is driven as much by the short interest as it is the results, however, and may result in some volatility in the near term. Longer-term, we expect to see SGH test and break on through resistance at both the $50 and $55 levels. In that scenario, the stock price should easily move on to set new all-time highs by early to mid-2022 at the latest. 

SGH Is A Smart Buy

Should you invest $1,000 in SMART Global right now?

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
SMART Global (SGH)2.1$50.97-4.8%N/A164.42Buy$68.00
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