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SMART Global Holdings Tanks After Earnings Smasher

Friday, October 2, 2020 | Thomas Hughes
SMART Global Holdings Tanks After Earnings SmasherSMART Global Holdings A Value Play On Memory

SMART Global Holdings (NASDAQ:SGH) reported earnings this morning and shares fell more than 6.0% because of it. The company reported a smash quarter but gave light guidance that, coupled with high short interest, sapped bullish sentiment for this stock. While not good news for those betting otherwise, it is good news for those looking to gain exposure to the memory-chip sector. This stock is trading at less than 8X earnings and offering a deep-value. If word from others in the group is to be believed, near-term weakness will soon be replaced by strength and that points to revenue and profit growth for SMART Global Holdings.

SMART Global Holdings is a specialty, integrated play on memory and computing technology solutions. The company offers DRAM memory products as well as supply chain services, hardware & software, and cloud services related to memory. Notably, the company recently teamed up with AMD (NASDAQ:AMD) and broke the petaflop barrier. The petaflop barrier is the current limit to what the “average” supercomputer is able to do. To be clear, SMART Global Holdings is not the first to cross the barrier but there are only a handful of computing solutions able to produce a quadrillion floating-point operations per second.

SMART Global Holdings Is A Micro-Cap Growth Story

SMART Global Holdings is no tech-giant but it is well-positioned in its category and poised for growth. The company’s fiscal Q1 guidance came in a bit weak compared to consensus but it jibes with what I see in other parts of the industry, and that weakness isn’t expected to last.

Micron Technologies (NASDAQ:MU) gave some color on the DRAM market that is encouraging. According to them, demand for DRAM chips is going to lag supply through the end of the year in the range of 15%. That situation will reverse next year, however, when demand is expected to outpace supply by 20%. What that means is that in the near-term, DRAM prices are under pressure but the long-term outlook is good.

Add to that a recent order from Amazon and the outlook brightens a little more. Amazon is expected to make an order in the 4th quarter worth 6% of the global supply, more than enough to move the needle on the supply/demand scale.

SMART Global Holdings Beats Consensus, Guides Light

SMART’s FQ4 was a good one, no two bones about it, but revenue fell shy of consensus. Revenue came in at $297 million, up 6.7% from the last year, but shy by $2.16 million or about 0.7% which I think is no big deal. The bottom line was better, EBITDA grew 30.64% over the prior year putting adjusted EPS at $0.82. That beat consensus by $0.03 offsetting a small miss in GAAP earnings. Looking forward, the company is expecting revenue in FQ1 in the range of $280 to $300 million and EPS of $0.70 but I think the guidance is light. There are accelerating trends in the tech-sector to consider and the company’s own efforts.

“Our fourth fiscal quarter results demonstrate the strength of our business during these challenging times. Fourth quarter revenue grew by 5.6 percent sequentially, driven by strength in both our Specialty Compute and Storage Solutions and Brazil businesses.  Additionally, reflecting the operating leverage in our business model, we achieved non-GAAP earnings per share of $0.82, more than 17 percent higher than the previous quarter,” said Mark Adams, President and CEO.

SMART Global Holdings business used to be firmly anchored in Brazil which poses more than one kind of problem. That situation has been alleviated over the past 3 years bringing Brazil’s share of total revenue from the 62% range to only 35%. That figure is expected to fall further even with the Brazilian market rebounding and that will be aided by a push into the EU.

“Given our strong balance sheet, we believe we are well-positioned to build on our growth and diversification strategy while leveraging our strong customer relationships, established global manufacturing and supply chain capabilities, and our track record of operational excellence,” concluded Mr. Adams.

The Technical Outlook: A Buying Opportunity In SMART Global Holdings

Shares of SMART Global Holdings are down hard in the premarket session but that is due more to the short-interest than the company’s report. There may be some more near-term weakness in this market but I wouldn’t count on it. What I would count on is a little volatility as the bulls and bears fight this one out. In the bulls case, the price action (for now) is still above a key support target at the short-term moving average and may bounce from it if tested. In the bears case, near-term weakness could keep this stock moving lower or trading in a range. Longer-term, I expect to see a bottom begin forming over the next few weeks to two months and then a move higher.

SMART Global Holdings Tanks After Earnings Smasher

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
SMART Global (SGH)1.7$44.12+3.8%N/A24.38Buy$60.50
Advanced Micro Devices (AMD)2.0$74.48+1.9%N/A100.65Buy$97.24
Micron Technology (MU)2.4$79.49+3.0%N/A30.00Buy$107.88
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