SMART Global Holdings (NASDAQ:SGH), a semiconductor chip manufacturer, is gaining traction among investors, with shares up over 82% in the last year and 57% year-to-date. The company’s growing portfolio of cutting-edge chips, which are set to take flight in this technological era, has boosted investor confidence.
Since Mark Adams took over as CEO of SMART Global in the midst of the pandemic last year, the chipmaker has performed quite well. Adams is focused on changing a memory business into a more diverse corporation.
The expanding end-market demand presents SMART Global with a massive total addressable market (TAM), tremendous upside potential, and a strong hedge against the cyclical nature of the semiconductor sector.
A Top Analyst, Rajvindra Gill of Needham, considers SMART Global to be the “top pick” for the year 2022. He believes the stock has multiple opportunities to grow from its current levels.
SMART: Analyst Foresees Rapid Expansion
According to Gill, SMART Global is well-positioned to weather supply chain disruptions in the semiconductor business. He provides a number of compelling reasons to believe that SMART Global will continue to perform strongly in 2022.
Diversification: To begin, the analyst is really pleased with the company’s transition in 2021. The firm has diversified into three segments: Intelligent Platform Solutions (IPS), LED Solutions, and Memory Solutions, and is no longer reliant on its Brazil Memory division.
Gill expects the business to profit from these divisions in the near future, with a good mix of improvements from both software and hardware in the IPS market, and LED Solutions continuing to shift to Sapphire wafers.
In response to the above context, he writes, “We expect the diversification to mediate both top and bottom line volatility, reducing risk and warranting a higher multiple for SGH shares.”
Strengthening Gross Margins: The company’s gross margins have grown considerably in recent quarters, driven by a favorable combination of “software and services.”
According to Gill, these high margins will be sustained “in the medium to long-term as the company focuses on its most profitable customers.” He goes on to say that the company’s margins should continue to be driven by “growth of the IPS segment” as well as “LT (long term) structural changes in the LED Solutions.”
Consequently, the analyst thinks SMART’s strong margins should result in more upside and help the company to generate solid EPS growth in the upcoming earnings season as well as in the future.
Stock valuation: Given the company’s broad revenue sources and potential for future margin expansion, Gill feels “SGH shares are undervalued” in comparison to its peers.
He writes, “We believe there is more upside from here as we still see SGH as cheap relative to virtually all comparables across its segments, even while the company’s gross margin expansion initiatives bear fruit.”
Based on his belief, Gill maintained his Buy rating on the company and a price target of $85, which implies an upside of almost 40% by the end of next year.
Wall Street’s Take
On TipRanks, Smart Global stock commands a Strong Buy consensus rating, based on 5 unanimous Buys. As for price targets, the average SGH stock price prediction of $74.40 implies almost 22.5% upside potential from the current levels.
Disclosure: At the time of publication, Shalu Saraf did not have a position in any of the securities mentioned in this article.
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