Penguin Solutions (PENG)

Semiconductor maker Penguin Solutions (NASDAQ:PENG) missed Wall Street’s revenue expectations in Q3 CY2025, but sales rose 8.6% year on year to $337.9 million. Its non-GAAP profit of $0.37 per share was in line with analysts’ consensus estimates.

Company Overview

Based in the US, Penguin Solutions (NASDAQ:PENG) is a diversified semiconductor company offering memory, digital, and LED products.

While no company offers the same diversified product portfolio, some competitors include Intel (NASDAQ:INTC), Dell (NYSE:DELL), NVIDIA (NASDAQ:NVDA), and SK hynix (KOSE:A000660).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Penguin Solutions’s 4% annualized revenue growth over the last five years was mediocre. This was below our standard for the semiconductor sector and is a tough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Penguin Solutions’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 2.5% annually.

This quarter, Penguin Solutions’s revenue grew by 8.6% year on year to $337.9 million, missing Wall Street’s estimates. Beyond the miss, this marks 4 straight quarters of growth, implying that Penguin Solutions is in the middle of its cycle - a typical upcycle generally lasts 8-10 quarters.

Looking ahead, sell-side analysts expect revenue to grow 10.4% over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

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.

This quarter, Penguin Solutions’s DIO came in at 62, which is 20 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Penguin Solutions’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 29.8% gross margin over the last two years. That means Penguin Solutions paid its suppliers a lot of money ($70.25 for every $100 in revenue) to run its business.

Penguin Solutions’s gross profit margin came in at 34% this quarter, marking a 5.7 percentage point increase from 28.3% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Penguin Solutions was profitable over the last two years but held back by its large cost base. Its average operating margin of 3% was weak for a semiconductor business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Penguin Solutions’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Penguin Solutions generated an operating margin profit margin of 3.7%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Penguin Solutions’s EPS grew at an unimpressive 7.4% compounded annual growth rate over the last five years. This performance was better than its flat revenue, but we take it with a grain of salt because its operating margin didn’t improve and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q3, Penguin Solutions reported adjusted EPS of $0.37, in line with the same quarter last year. This print slightly missed analysts’ estimates. Over the next 12 months, Wall Street expects Penguin Solutions’s full-year EPS of $1.85 to grow 14.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Penguin Solutions has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8.4%, lousy for a semiconductor business.

Taking a step back, an encouraging sign is that Penguin Solutions’s margin expanded by 4.3 percentage points over the last five years. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Penguin Solutions burned through $17.95 million of cash in Q3, equivalent to a negative 5.3% margin. The company’s cash burn was in line with the same quarter last year and is a deviation from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Penguin Solutions historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.9%, lower than the typical cost of capital (how much it costs to raise money) for semiconductor companies.

Penguin Solutions reported $389.5 million of cash and $740 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $186.6 million of EBITDA over the last 12 months, we view Penguin Solutions’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $12.56 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Penguin Solutions’s adjusted operating income beat compared to Wall Street’s estimates. On the other hand, its revenue slightly missed and its EPS was just in line with Wall Street’s estimates. Looking ahead, EPS guidance also missed. Overall, this quarter could have been better, especially the financial outlook. The stock traded down 11.5% to $23.85 immediately following the results.

Updated: December 3, 2025 at 9:21 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Penguin Solutions.

Penguin Solutions doesn’t pass our quality test. For starters, its revenue growth was mediocre over the last five years. And while its operating margin didn’t move over the last five years, the downside is its low gross margins indicate some combination of pricing pressures or rising production costs. On top of that, its low free cash flow margins give it little breathing room.

Penguin Solutions’s P/E ratio based on the next 12 months is 10x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $27.63 on the company (compared to the current share price of $21.50).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.