With semiconductor stocks, there is a particular desire to find the next big thing. This comes from the incredible success of stocks like NVIDIA (NASDAQ: NVDA) and Taiwan Semiconductor Manufacturing (NYSE: TSM). Those companies have gone from humble beginnings to now being among the top ten largest in the world.

This brings me to a company like Penguin Solutions (NASDAQ: PENG), formerly SMART Global Holdings. With a market capitalization of just $1 billion and disappointing returns recently, it is fair to wonder if this stock could break out. Its special focus on AI and high-performance computing (HPC) creates intrigue, not to mention the fact that it is trading at a forward price-to-earnings (P/E) multiple of just 11x, a bottom-barrel valuation when compared to the average forward P/E of U.S. semiconductor stocks of 39x.

Below, I’ll break down Penguin’s business as it stands now and reveal what I think the future could hold for this small-cap chip stock.

Segment Focus: Advanced Computing

Penguin divides its business into three segments: Advanced Computing, Integrated Memory, and Optimized LED. In fiscal 2024, these comprised 47%, 30%, and 22% of the company’s total revenue, respectively.

Let’s focus on the company’s largest segment, Advanced Computing. In this segment, Penguin builds integrated computing platforms. The company assembles computing parts together and then sells them as one product. For example, Penguin would buy a graphics processing unit, motherboards, and other parts and put them together to create a server. In this sense, they compete with Dell (NYSE: DELL) and Hewlett Packard Enterprise (NYSE: HPE), which also offer server solutions.

However, they can also work with these firms. Penguin recently announced a collaboration with Dell. Penguin’s OriginAI architecture will now be available in many of Dell’s AI-optimized servers. This architecture helps firms optimize the performance of large-scale AI-enabled data centers, ensuring that they balance competing needs to maximize their return on AI investment.

Still, even if Penguin’s service is available when customers purchase Dell servers, it doesn’t actually mean customers will opt in. Shares are up a notable 13% since the announcement, as of the Dec. 2 market close. After a fantastic 2023, which saw the segment’s revenues increase by 70%, revenues fell by 26% in 2024. This shows the semiconductor industry's cyclical nature. However, it raises concerns about a long-term investment in Penguin. 

Penguin’s Total Revenue Growth

When it comes to total revenue growth, the company has been in a bad way since the beginning of 2023. The company’s year-over-year revenue growth has been negative every quarter since then. However, a significant contributor is the discontinuation of its operations in Brazil. Brazil's operations were contributing hundreds of millions of dollars in annual revenue. So, halting these operations makes revenue growth appear worse than it is at its core. However, even when controlling for the divestiture, revenue growth is going in the wrong direction.

Looking at just 2024 numbers provides more room for optimism. For Q1 to Q4 of this year, revenue rose consecutively every quarter. Still, the growth rate isn’t particularly impressive at an average of just over 4% per quarter. Building on the sequential revenue growth momentum the company has achieved in 2024 is critical to success in 2025. The Dell collaboration will likely aid in that.

Penguin Is a Name to Watch as The AI Revolution Is Poised to Enter Its Next Phase

Overall, Penguin Solutions seems to have a niche that companies like Dell believe can add value to their customers, but they still largely compete with them when it comes to selling actual servers. Expecting companies to pick Penguin servers ahead of Dell’s is difficult to imagine. This is especially true if they can get some of the benefits Penguin’s AI expertise offers without having to build their whole data center with its servers.

This positions Penguin’s offerings as more of a nice-to-have rather than a necessity for implementing AI. However, this does make the company a name to watch. As the AI revolution progresses from its early stage, nice-to-haves could turn into essentials. I think seeing the impact of the Dell collaboration in the coming quarters will tell us about Penguin's future ability to expand its business.