Smart Global's Stratus Acquisition And Core Expertise In Custom Memory Modules Upped Its Position In HPC/AI, Analyst Says

Rosenblatt analyst Kevin Cassidy maintained a Buy rating on Smart Global Holdings Inc SGH, with a price target of $38.00. Cassidy remained positive on SGH shares going into January 3, 2023, earnings report. 

SGH's recent acquisition of Stratus has strengthened its position in the HPC and AI system market, combined with the company's core expertise in custom memory modules for data centers, networking, and telecom, which positions the company well for long-term growth. 

The analyst saw these businesses as removing the volatility of the cash flow businesses, expecting SGH's 1QF23 results to be in-line with consensus. 

The general trends had not changed much in the past quarter. Cassidy's estimate may be too conservative as supply chains loosen. 

Looking out to 2QF23, the analyst expects IPS' order backlog conversion to revenue to continue with the supply chain loosening. Cassidy will focus on backlog visibility into 2HF23 and software and services traction.

The demand for core specialty memory offerings is expected to remain healthy from OEM customers in networking, telecom, enterprise computing, and storage segments, being less sensitive to leading-edge commodity memory price fluctuations. 

The commodity side of SGH's memory business is in Brazil. Brazil clocked the lowest quarterly revenue in many, many years. The analyst believes the lower memory prices will drive increasing content and system.

In the long term, Cassidy saw two memory industry trends, DDR5 and CXL, driving new growth for SGH's Memory Solutions Group.

During 4QF22, LED revenue declined a surprising ~20% Q/Q due to strong headwinds in China with COVID-related policies contributing to supply chain constraints impacting demand. The business continues to be soft in China and is starting to see softness in the U.S. and Europe. 

Cassidy expects another quarter of inventory reductions in 2QF23. The analyst expects the LED business to return to Q/Q and Y/Y growth in 2HF23. 

The 2QF23 management's guidance would be in-line with the consensus estimate. The key metrics will be whether Brazil's handset and PC memory content increase enough to offset commodity memory pricing declines also if the LED channel inventory has been reduced to match the lower demand caused by China's COVID lockdowns. 

The analyst remains confident that demand for HPC and AI systems and specialty memory modules remains robust into CY23.

Price Action: SGH shares traded higher by 2.59% at $15.07 on the last check Thursday.