SGH Bottomed, But Can It Reverse And Move Higher?

April 05, 2023 at 09:40 AM EDT

SGH stock

SGH (NASDAQ: SGH) shares hit bottom late last year, and this is a chance it will reverse course and begin to rally again. The question is when the rally will happen; the answer may be later this year. The Q2 results were mixed but prove the company’s resilience in uncertain operating conditions. While 2 segments were weak, the 3rd, the company’s growth driver, outperformed expectations and offset the weakness to a degree. The takeaway is that SGH is in a good position relative to its market, its diversified portfolio will help sustain it while the microchip, manufacturing and economy at large reset themselves, and there is a significant opportunity for capital gain.

SGH Is A Smart Investment

The stock trades at only 7X its earnings, about half what you pay for other microchips/component-oriented companies. Skyworks (NASDAQ: SWKS), a supplier to Apple (NASDAQ: AAPL), trades at 12X its earnings, while Alpha And Omega Semiconductor (NASDAQ: AOSL) and Magnachip (NASDAQ: MX) trade near 14X earnings. SGH has other appeals; the Intelligent Platform Solutions segment, the company’s growth driver, has applications in AI, machine learning, analytics, networking and specialty lighting, which are all hot markets today.

We exited Q2 with a strong balance sheet, including $376 million in cash and cash equivalents,” commented CEO Mark Adams. “We remain disciplined in managing our expenses given the continued challenging economic environment, while maintaining strategic investments to capitalize on the tailwinds of AI, machine learning, data analytics, networking and specialty lighting, which we believe will drive long-term growth for SGH and create value for our shareholders.”

The Q2 results are mixed, and the guidance is tepid, but the report has some signs of strength. The revenue fell 4.5% YOY to $429 million and missed the Marketbeat.com consensus estimate, but the miss is slim, and the margin news is good. The legacy Memory and newer LED Solutions segments declined YOY, but ISP grew by 5.4% to 51.8% of the business. GAAP gross margin improved by 60 basis points while the adjusted widened by 290. However, the operating margins declined due to investment in the business and 1-offs related to share-based compensation, restructuring and acquisitions. At least 2 of those reasons are suitable for the company's long-term health and are expected to dissipate.

Analysts Double-Down On SGH

The analysts are doubling down on SGH, although this news is mixed. Marketbeat’s analyst tracking tools have picked up at least 3 new reports, amounting to 3 reiterated Buy ratings and 1 price target reduction. The takeaway is that SGH is pegged at a Buy, which has held firm for the last year. The price target has been moving lower and moved lower with the new target reduction, but the 3 new reports, including the lowered target, all have targets above the consensus figure, which is projecting a 50% upside for this market. SGH may edge lower in the near term, but the bottom is in because even the lowest price target is above the current action.

The charts are favorable and show a Head & Shoulders reversal pattern. The caveat for investors and traders is that this pattern often reverses a market from down to sideways and not down to up. In that scenario, SGH may trend sideways within the trading range established by the pattern. A complete reversal will be in play if the market can get to the pattern's neckline and break out to new highs, but even then, there will be hurdles to cross.