SMART (NASDAQ:SGH) Posts Better-Than-Expected Sales In Q3, Stock Soars

Petr Huřťák /
2023/06/29 4:34 pm EDT

Semiconductor maker SMART Global Holdings (NASDAQ:SGH) announced better-than-expected results in the Q3 FY2023 quarter, with revenue down 17.1% year on year to $383.3 million. The company expects that next quarter's revenue would be around $375 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. SMART made a GAAP loss of $24.1 million, down on its profit of $24.5 million, in the same quarter last year.

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SMART (SGH) Q3 FY2023 Highlights:

  • Revenue: $383.3 million vs analyst estimates of $375.1 million (2.21% beat)
  • EPS (non-GAAP): $0.66 vs analyst estimates of $0.40 (63.6% beat)
  • Revenue guidance for Q4 2023 is $375 million at the midpoint, below analyst estimates of $377.6 million
  • Free cash flow of $27.8 million, down 68.4% from previous quarter
  • Inventory Days Outstanding: 72, down from 86 previous quarter
  • Gross Margin (GAAP): 25.7%, up from 24.7% same quarter last year

“The team achieved strong results for the third quarter in what remains a challenging global economic environment. Non-GAAP gross margin increased to 28.0%, an improvement of 230 basis points from the same period last year, and achieved non-GAAP earnings of $0.66 per share. In addition, we exited the third quarter with a strong balance sheet, including record cash and cash equivalents of $401 million,” commented the Company’s CEO Mark Adams. “With the announced agreement to sell an 81% interest in SMART Brazil on June 13, we are continuing our transformation to a high-performance, high-availability enterprise solutions company, and believe we are positioned to benefit from emerging trends in AI, machine learning and data analytics,” indicated Adams.

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

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 solid, averaging 18.7% annually. But as you can see below, last year quarterly revenue declined from $462.5 million to $383.3 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

Despite SMART revenues beating analyst estimates, this was still a slow quarter with a 17.1% revenue decline.

SMART's looks headed into the trough of the semi cycle, as it is guiding to revenue declines of 14.3% YoY next quarter, and analysts are estimating 3.79% declines over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 72, 2 days below the five year average, showing no indication of an excessive inventory buildup at the moment.

Key Takeaways from SMART's Q3 Results

With a market capitalization of $1.29 billion SMART is among smaller companies, but its more than $401.3 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed by the strong improvements in SMART’s inventory levels, which could signal positive things to come as it is often a sign of where a semis company sits in the cycle. And we were also excited to see that EPS (earnings per share) outperformed Wall St’s expectations. On the other hand, it was less good to see some deterioration in operating margin. Additionally on the negative front, revenue guidance for the next quarter missed analysts' expectations. However, EPS guidance beat. Lastly, the CEO reminded investors that the June 13th sale of 81% interest in SMART Brazil continues the company's "transformation to a high-performance, high-availability enterprise solutions company, and believe we are positioned to benefit from emerging trends in AI, machine learning and data analytics." Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 5.38% on the results and currently trades at $28.03 per share.

Should you invest in SMART right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.