SMART Global Holdings Now Positioned for Upside

Key Points

• The semiconductor industry is saturated today, leaving a clear advantage to be had on risks that are 'priced in.'
• SMART Global is a prime case study of why a bit of due diligence can go a long way, bringing you some truth behind Wall Street's panic over the stock's latest financial releases. 
• Analysts know this, hence the massive upside above the industry average.

In the world of semiconductor stocks, all the hype and excitement from 'smart' money as well as retail seems to be headed toward the big names, you know, the usual suspects: firms like Taiwan Semiconductor Manufacturing NYSE: TSM and Intel NASDAQ: INTC or even NVIDIA NASDAQ: NVDA.

There is a saying that Warren Buffet likes to throw around when speaking of market cycles or other market ebbs and flows. It goes something like, "You only know who is swimming naked when the tide goes out," you may be wondering how this applies to the current chip industry? rest assured, it does.

Now that there are clear divides between industry leaders, especially as the 'chip war' gets underway between the United States and China, some giants may have yet to price the possibility of escalating conflicts. Yet, one low-flying name has shaken off most risks, leaving you plenty of upside.

Tipping the Scale

It is not very common to hear that a well-known firm within an industry can see its stock price sell off by as much as 26.7% overnight, yet this is what investors are facing as they chew their nails away and watch SMART Global Holdings NASDAQ: SGH crash straight into a bear market.

Following Wall Street's definition of a bear market, which constitutes a decline from all-time (or recent) highs of more than 20%, SMART Global may be ripe for investing at a discount. If investing was that easy, you would hear more people talk about the millionaire next door; it's time for some due diligence.

Beginning with a sentiment check-up around analyst ratings, you can figure out where the industry upside is. Regarding Intel, analysts expect a net downside of 6.2% from today's prices, which is not a great start.

NVIDIA, a stock riding on the market hype and favoritism after a couple of unshakeable quarters and massive advances in its A.I. (artificial intelligence) department, is on the other side of the equation. However, analysts only see a 19.6% upside on this one. All the upside has already been priced in.

Moving down the size scale and into names perhaps underserved by media outlets and Street analysts, you can see SMART Global's ratings. With a consensus price target of $33.6 a share, the implication is a net 42.5% upside from where the stock closed on Thursday evening.

However, after the market closed, the stock shot down to $17.3 a share, expanding the upside that this price target carries up to 94% from these discounted prices. 

Even if there is an all-out technology war escalation, chances are this stock does not have that much room left to move lower. Therefore, you can hedge this possibility away from your portfolio. Now, is there a viable concern that is causing the stock to fall? 

To Worry or not to Worry

SMART Global reported its full-year 2023 financial results right after the market closed on Thursday, sending the stock crashing after traders and investors digested the initial figures. A 63% decline in EPS was enough to send the stock crashing; however, here is where your skills can save the day.

Understanding that the company has agreed to sell up to 81% of its SMART Brazil operations can shed some light on the reality of the business operations. On a non-GAAP (generally accepted accounting principles), earnings per share only fell by 4.9%.

Why the gap? When inspecting the company's financials, you will find an item called 'discontinued operations,' which are directly tied to the closing of Brazilian operations, accounting for closing and sale costs unrelated to the actual core business within SMART. 

On a quarterly basis, the fourth quarter numbers blow EPS out of the water. With earnings of $1.17, SMART expanded this figure by more than six-fold from $0.18 a year ago. How can you ensure this is not one of those 'massage the numbers' situations? Simple actually.

Free cash flow (operating cash flows minus capital expenditures) is a more direct measure - often a proxy - for earnings; many investors rely on this figure since it cannot be as easily adjusted or manipulated, offering a better picture of what happened.

In the case of SMART, free cash flow grew from roughly $15 million up to $29 million in a year, a 93% increase in the real earning power of the core business, even after accounting for the divestments in Brazil and its related costs.

Even as Wall Street panics over the initial figures, savvy investors like yourself equipped with this knowledge can now take advantage of the fear and pick up some easy profits for you and your loved ones.