Weak details or not, the 25% price implosion in SMART Global (NASDAQ: SGH) share price is an opportune time to buy into this stock. The expectations were high going into the Q2 report, and end-market normalization is still in play, so weakness is not surprising. The takeaway is that this company is well-positioned for the decades-long AI upgrade cycle that has only just begun, and there are reasons to think it is of ultra-deep value.
"AI is also reshaping the memory market landscape as the need for higher density and greater bandwidth becomes increasingly critical to system performance required to handle the most advanced compute workloads," said SMART Global CEO Mark Adams.
Analysts like what they saw in the report; two of the five tracked by Marketbeat lifted their price targets significantly, suggesting this stock has an ultra-deep value. Stifel Nicolaus and Needham & Company maintained their Buy ratings, aligning with the broader consensus, and lifted their price targets to $27.50 and $27. This is significant because they are raising the low end of the range, which sees a 40% upside from current price points. The consensus of five analysts is that the stock is worth about $31 or roughly 55% upside.
SMART Global Holdings Approaches Critical Pivot
SMART Global Holdings had a challenging quarter primarily due to persistently high inventory in the memory end-market. However, signs are emerging of improving demand with higher sequential results, and the forecast includes accelerating activity in the back half of the year and a return to growth by Q1 F2025.
The FQ2 2024 results are mixed. The company produced $284.8 million in net revenue, a decline of 33.6% compared to last year. The revenue missed the consensus estimate reported by Marketbeat but by a slim ten basis points, and margins were better than expected. LED is the only segment to post YOY growth, while Intelligent Platform Solutions is the only one to grow sequentially. ISP is the company's largest operating segment, which has grown by 19% sequentially and is expected to remain solid through the end of the year.
The margin news is mixed. The company reported sequential contraction, but YOY gains left the adjusted EPS up $0.03 and $0.02, which was better than expected. The guidance is what left the market cold. The company is guiding for sequential improvement but not the NVIDIA (NASDAQ: NVDA)-like AI boost the market expected. Regardless, the guidance is sufficient to maintain a positive outlook for the business, including improving shareholder value.
The balance sheet highlights include an improved cash position, lower inventory and increased total assets compounded by debt and liability reductions. The net result is a 40% increase in shareholder value, another factor suggesting ultra-deep value. This stock is trading at only 16x earnings compared to double or triple that amount for other well-positioned semiconductor/component operators.
SMART Global Holdings Share Price Fell to a Critical Support Level
The price action in SGH fell 25% following the Q2 release and may fall further. Among the caveats for investors and traders is that this move was amplified by economic data released concurrently with the Q2 results. That data was the March CPI report, hot on all counts, and it sparked a broad-market sell-off that left the semiconductor industry down 2%. The market is at a critical and potentially very strong support level, so a rebound may also be expected. The question is how high it will get and if the market can sustain an uptrend in this stock.
The risk is that Q3 results will not align with the outlook for accelerating business activity in the back half of the year. In that scenario, SGH stock could remain range-bound at or near current levels until more economic clarity exists. The critical resistance is near $21.70; a move above it could lead to a retest of the 2023 highs. The crucial support level is near $19.30 and the mid-point of the existing trading range.
