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SMART Global Holdings Inc: Small-Cap Technology Stock Could Doubl…

By George Leong, B.Comm. Published : September 13, 2021

SMART Global Holdings Inc: Small-Cap Technology Stock Could Double

SGH Stock Is a Way to Play the Growth of Technological Innovations

The semiconductor segment is undergoing a structural change as the U.S. aims to build up its domestic manufacturing.

Emerging technologies such as the Internet of Things, artificial intelligence, and machine learning will require critical hardware. To play this, investors might want to consider SMART Global Holdings Inc (NASDAQ:SGH), a compelling technology stock.

The company focuses on developing specialty memory, storage, and hybrid solutions. Its markets include computing, networking, communications, storage, mobile, and industrial.

SMART Global stock is trading just above the midpoint of its 52-week range, up by 88% over the past year.

But SGH stock’s valuation is cheap, which provides investors with a path toward additional price appreciation.

Chart courtesy of StockCharts.com

Strong Fundamentals Support Bull Case for Smart Global Stock

SMART Global Holdings Inc’s five-year revenue picture shows a high point in 2018, followed by two straight years of contraction.

Fiscal Year Revenues Growth
2016 $534.4 Million N/A
2017 $761.3 Million 42.5%
2018 $1.3 Billion 69.3%
2019 $1.2 Billion -5.9%
2020 $1.1 Billion -7.4%

(Source: “SMART Global Holdings Inc.” MarketWatch, last accessed September 10, 2021.)

But there’s room for optimism, as SMART Global is expected to ramp up its revenues by 33.2% to $1.5 billion in 2021, followed by 21.3% to $1.8 billion in 2022. (Source: “SMART Global Holdings, Inc. (SGH),” Yahoo! Finance, last accessed September 10, 2021.)

The revenue forecast implies an extremely attractive valuation. SMART Global trades at 0.78 times its consensus 2021 revenue estimate and 0.64 times its consensus 2022 revenue estimate.

SMART Global Holdings Inc generated earnings before interest, taxes, depreciation, and amortization (EBITDA) income in five straight years, prior to reporting weakness in the last two years. I expect the company’s EBITDA to pick up as its revenues and earnings ratchet higher.

Fiscal Year EBITDA (Millions) Growth
2016 $38.8 N/A
2017 $87.6 125.7%
2018 $193.4 120.9%
2019 $115.6 -40.2%
2020 $86.3 -25.3%

(Source: MarketWatch, op. cit.)

As far as profitability goes, SMART Global produced generally accepted accounting principles (GAAP) earnings-per-share (EPS) profits in 2018 and 2019 before making a small GAAP diluted EPS loss in 2020, during the pandemic.

Fiscal Year GAAP Diluted EPS Growth
2016 -$1.44 N/A
2017 -$0.49 65.9%
2018 $5.17 1,154%
2019 $2.19 -57.7%
2020 -$0.05 -102.2%

(Source: MarketWatch, op. cit.)

On an adjusted basis, SMART Global Holdings Inc made money, and the consensus adjusted earnings estimates have been rising.

Analysts estimate that the company will deliver adjusted earnings of $4.65 per diluted share in 2021, compared to $2.59 in 2020. For 2022, its adjusted earnings are expected to surge to $5.70 per diluted share. (Source: Yahoo! Finance, op. cit.)

SGH stock trades at a cheap 10.2 times the company’s consensus 2021 earnings estimate. Moving to 2022, the valuation drops to a mere 8.3 times the consensus earnings estimate.

SMART Global has produced positive free cash flow (FCF) in four of the last five years. I expect the company’s FCF to improve as its revenues and earnings ramp higher.

Fiscal Year Free Cash Flow (Millions) Growth
2016 $1.2 N/A
2017 -$19.6 -1,726%
2018 $42.2 315.0%
2019 $136.2 223.0%
2020 $54.1 -60.3%

(Source: MarketWatch, op. cit.)

Analyst Take

Institutional ownership of SMART Global Holdings Inc is broad and has been rising, with 242 institutions holding a 90.6% stake in SMART Global stock. (Source: Yahoo! Finance, op. cit.)

As far as the price-to-book ratio goes, SGH stock trades at 2.3 times, representing a major improvement over the 4.4 times and 15.7 times in 2017 and 2018, respectively.

SMART Global stock’s cheap valuation provides investors with an opportunity to pick up a technology growth stock at an attractive price. SGH stock could double in price and still not look stretched.

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