No Surprises In SMART's (NASDAQ:SGH) Q2 Sales Numbers, Stock Soars

Adam Hejl /
2024/07/09 4:35 pm EDT

Semiconductor maker SMART Global Holdings (NASDAQ:SGH) reported results in line with analysts' expectations in Q2 CY2024, with revenue down 21.6% year on year to $300.6 million. On the other hand, next quarter's revenue guidance of $325 million was less impressive, coming in 1.4% below analysts' estimates. It made a non-GAAP profit of $0.37 per share, down from its profit of $0.66 per share in the same quarter last year.

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SMART (SGH) Q2 CY2024 Highlights:

  • Revenue: $300.6 million vs analyst estimates of $301.5 million (small miss)
  • EPS (non-GAAP): $0.37 vs analyst estimates of $0.31 (19.8% beat)
  • Revenue Guidance for Q3 CY2024 is $325 million at the midpoint, below analyst estimates of $329.5 million
  • Gross Margin (GAAP): 29.6%, up from 25.8% in the same quarter last year
  • Inventory Days Outstanding: 76, down from 78 in the previous quarter
  • Free Cash Flow of $76.1 million is up from -$27.12 million in the previous quarter
  • Market Capitalization: $1.25 billion

"We are pleased with our Q3 operating results and continued progress in our transformation into a high-performance, high-availability enterprise solutions company," said Mark Adams, CEO of SGH.

Based in the US, SMART Global Holdings (NASDAQ:SGH) is a diversified semiconductor company offering memory, digital, and LED products.

Processors and Graphics Chips

The biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.

Sales Growth

SMART's revenue growth over the last three years has been unimpressive, averaging 0.9% annually. This quarter, its revenue declined from $383.3 million in the same quarter last year to $300.6 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

SMART Total Revenue

SMART had a difficult quarter as revenue dropped 21.6% year on year, missing analysts' estimates by 0.3%. This could mean that the current downcycle is deepening.

SMART looks like it's on the cusp of a rebound, as it's guiding to 2.6% year-on-year revenue growth for the next quarter. Analysts seem to agree as consesus estimates call for 18.6% growth over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

SMART Inventory Days Outstanding

This quarter, SMART's DIO came in at 76, which is 3 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Key Takeaways from SMART's Q2 Results

We were impressed by SMART's strong gross margin improvement this quarter. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its revenue guidance for next quarter and this quarter's revenue missed analysts' expectations. Overall, this quarter still seemed fairly positive and shareholders should feel optimistic. The stock traded up 5.9% to $24.60 immediately following the results.

SMART may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.