The Analysts Raise Their Targets For SMART Global Holdings
SMART Global Holdings (NASDAQ: SGH) has been in a downtrend for the last two quarters due to a combination of factors that have nothing to do with the health of the business. Selling pressure begins with the institutions which were heavy sellers of the stock in Q4. If you’ll remember, Q4 coincides with an all-time high in share prices so a little profit-taking and rotation are to be expected. That activity was amplified by short selling which had the short interest at a relatively high 9% just ahead of the fiscal Q2 earnings report. Add in a little insider selling, a stock split, and the fear of economic headwinds and it is no wonder the stock didn’t sell off harder.
The takeaway is that results were much better than expected, the guidance is positive, and there is a new share repurchase program so we think a bottom is at hand. Regardless, trading at less than 6X its earnings outlook and buying back stock, this tech company is one attractive buy. That may be why institutional activity and insider selling slacked off in Q1, and why the analysts are upgrading their price targets now. At least 3 analysts have upped their price target on the stock putting the Pricetargets.com consensus estimate at $43 or 85% above the recent price action.
SMART Global Holdings Has Robust Quarter
SMART Global Holdings’ growth slowed in Q2 but there are three things in its favor. The first is that growth slowed to a high 47% from the previous quarter's 61%, the second is that this is the 8th consecutive quarter of revenue growth, and the third is that revenue beat the consensus by 325 basis points with strength in all end markets. The company makes and markets a wide range of electronic components for AI, machine learning, analytics, storage, and IoT so is well positioned for today’s conditions.
Moving down to the margin, the company reported a 750 basis point improvement in the gross margin, 660 bps adjusted, which drove a significant increase in cash flow. The only bad news is that GAAP earnings fell nearly 70% YOY but this is due to investment in the business, inventory, and R&D expenses more than anything else. On an adjusted basis, the EPS of $0.87 is up 98% from last year and beat the consensus by $0.15.
The guidance is also positive, with Q3 revenue expected in the range of $435 to $475 million versus the $452 analysis consensus, but not rally-inducing. The truly good news in the guidance is the margin, however, which is expected to hold steady near 26%. This should drive adjusted earnings of $0.75 +/- $0.08 compared to the $0.71 consensus and we see some upside risk in the revenue figures. Assuming supply chain log jams begin easing as they are expected to do revenue growth could come in well above the 3% or so currently forecast.
Capital Returns Will Help Put A Bottom In SMART Global Holdings
Now that investors have had a chance to sell some of their extra SGH shares, the company is ready to start buying some back. The company announced a $75 million share repurchase program that is worth about 6% of the current market. The program has no expiration date but could be discontinued if conditions change. Until then, the balance sheet looks like it is in good enough shape to us.
The Technical Outlook: SMART Global Holdings Makes A 100% Retracement
Shares of SMART Global Holdings were down in premarket the wake of the Q2 results and outlook but nearing a bottom. The move has price action at a 100% retracement of last fall’s rally and above the next key support level. If support fails at the $21 level the downtrend could continue but we don’t see that happening. In our view, this stock should begin to bottom at this level and may even put in a reversal should the general economic outlook for calendar Q2 and/or the back half of 2022 begin to brighten. As we finish this post, we see the market has opened and SGH is now moving higher. The bottom my already be in.
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