Smart Global Holdings Business Acceleration Is Underway

Smart Global Holdings Defies Expectations, Shares Move Higher 

Smart Global Holdings (NASDAQ: SGH) is proving to be a class-A play on diversified semiconductor technology. The company has been in transition over the past year, reorganizing existing businesses and integrating new ones, and has emerged as a leader not only in chip technology but LEDs as well. The recent acquisition of Cree Technologies has yet to surface in the data but it looks like it will in the next report. Based on the Q2 results and guidance for Q3 Smart Global Holdings growth is not only ahead of consensus, it’s accelerating and the guidance is probably on the cautious side. 

Smart Global Holdings Earnings Report Beats Expectation

Smart Global Holdings earnings report is technically a mixed bag but the $0.21 miss on the bottom line can be easily overlooked if for nothing else than a marked increase in CAPEX during the quarter, CAPEX that is fueling top-line and adjusted earnings growth. So, the $304.00 million in net consolidated revenue is up 30% sequentially, 11.8% YOY, and beat the consensus by 270 basis points. The gains were driven by strength in most end markets with a notable 30% increase in Intelligent Platform Solutions. Memory solutions also saw some strength driven by widespread shortages of semiconductors. 

Moving down the report, the company was able to lever its revenue strength and widen margins above expectation. The 19.5% in adjusted gross margin is better than consensus by 50 basis points and there is a positive outlook for additional margin expansion in the coming quarter. The GAAP EPS of $0.23 missed the consensus by almost 50% but is offset by strength in the adjusted earnings. The adjusted EPS of $0.87 is up 39% from last year and beat the consensus by $0.07. 

As for the guidance, not only is the Cree acquisition going to begin impacting business in the coming quarter but the company is expecting strong results in its continuing operations as well. The company is projecting revenue in the range of $400 to $430 million or up 33% sequentially at the low end and 43% from last year. The strength in sales should drive margins in the 19% to 21% range and deliver EPS of $1.00 to $1.20 versus the $0.90 expected by the analysts. 

The Analysts Like What They See In Smart Global Holdings 

There have been at least four major analysts notes out since Smart Global Holdings released its Q2 earnings and the sentiment is entirely bullish. Of the four, Barclays initiated at Overweight, while three others maintained their bullish stances while upping the price target. Of these four, the consensus target is now $62.50 or about 30% upside from Tuesday’s closing prices. Based on what we are seeing in the report, we expect more analysts to get on board with upgrades to drive the market much higher. 

Looking at the charts, the outlook was bullish before the Q2 report and now it is even more so. The news has shares up more than 2.0% in the premarket action and just shy of the multi-year high. In our view, this high will soon fall and the high-short interest is sure to help. At nearly 13% there is more than enough short interest to fuel a nice little squeeze that should get this stock well above the current resistance point. Once that happens we think this market could rise by another $25 or about 50% upside from the $50 resistance level.