SMART Global Holdings Optimizing AI Investments: Analyst Forecasts Upside In Valuation

Needham analyst Rajvindra Gill maintains SMART Global Holdings, Inc SGH with a Buy and raises the price target from $32 to $37.

The re-rating follows a solid beat and raise quarter.

SGH is divesting the Brazil segment, projected to boost the gross margin by 200bps (neutral to EPS), free up capital for AI investment and M&A, and unlock the valuation multiple.

The IPS segment benefits from secular AI, ML, and data analytics trends with its highly customizable hardware and service solution.

IPS accounted for 45% of sales and grew 31% Y/Y in 3Q FY23, excluding Stratus ($45 million per quarter). Penguin Computing has 25 years of experience designing, installing, and managing supercomputers and HPC systems.

SGH mentioned it could deploy 50-60K NVIDIA Corp NVDA GPUs for AI training at scale. For example, Meta Platforms Inc META completed the second phase build-out of its AI Research SuperCluster, with Penguin as the implementation partner. 

SGH helps companies design an optimized AI architecture compute system for specific HPC and AI workloads, node provisioning, and clustering monitoring. 

Gill highlights that IPS sales will be lumpy due to the unpredictability of large installations and government spending plans.

RFQ funnel is growing for AI implementations, although the company is selective on which projects to choose to ensure higher margins.

The gross margin profile will improve on a mix shift toward IPS and services. 

The analyst sees the valuation expanding as the revenue mix shifts toward AI and HPC.

Rosenblatt analyst Kevin Cassidy reiterates SMART with a Buy and a $35 price target.

SGH delivered a solid quarter and outlook. All three business units’ revenue has stabilized and is positioned for growth. 

Customer engagements for AI and HPC have increased significantly in multiple end markets such as Oil & Gas, Financial, Healthcare, Research, and Cloud. 

Management’s strategy is to select customers needing SGH’s customization and servicing capabilities. 

Cassidy expects this business’ visibility will increase in the next quarter. The Memory Solutions and LED businesses are recovering, though not at the pace he had been modeling. 

The analyst lowered his estimates for this slower growth. 

There will likely be no downside to non-GAAP EPS for the Brazil divestiture. He continues to view SGH as a great way to play the secular AI theme at a reasonable valuation.

Price Action: SGH shares are trading higher by 9.8% to $29.25 on the last check Friday.