SMART Global Is a Great Play on Mobile Device Growth
The cost of dynamic random-access memory (DRAM) has been rising since mid-July 2016, and the consensus is that DRAM prices will continue to go higher in 2018, driven by the explosion in mobile devices and a broad demand for additional memory.
A small-cap specialty memory stock that looks intriguing is SMART Global Holdings Inc (NASDAQ:SGH), which has underperformed the S&P 500 (with a decline of nine percent over the past three months) but has the potential for above-average gains.
SMART Global is a designer and manufacturer of specialty memory, storage, and hybrid solutions used by a network of over 250 global original equipment manufacturers (OEMs).
What intrigues me about SGH stock’s potential is the strength in DRAM prices and other flash memories in a broad range of sectors including the automotive, computer, industrial, gaming, networking, telecommunications, aerospace, defense, printer, server, and storage sectors.
My Bull Case for SGH Stock
The expected growth for SMART Global stock is stellar and, in my view, investors haven’t priced it in.
Chart courtesy of StockCharts.com
Revenues are estimated to surge 50.8% to $1.15 billion in FY18 versus $761.3 million in FY17, followed by a smaller 11.6% to $1.28 billion in FY19. There is a high estimate of $1.42 billion in revenue for FY19. Estimated revenues for FY18 have increased from $860.0 million, so we are seeing impressive growth and rising estimates. (Source: “SMART Global Holdings, Inc. (SGH),” Yahoo! Finance, last accessed February 15, 2018.)
What is also impressive is that SMART Global is extremely profitable.
The company made $2.26 per diluted share in FY17 and is expected to ramp up earnings to $4.92 per diluted share in FY18, followed by $5.36 per diluted share in FY19. There is a high estimate of $7.38 per diluted share for FY19.
The intense demand for DRAM and flash memories will help power the tailwinds for memory developers such as SMART Global.
The validation for SGH stock is extremely attractive, with the stock trading at 0.62-times the consensus FY18 sales.
On an earnings basis, SMART Global trades at a cheap 6.15-times the FY19 earnings-per-share (EPS) estimate, which could fall to as low as 4.47-times the high estimate. This valuation clearly undervalues SGH stock, which means it is a good opportunity at the current price.
Even if SMART Global doubles in price, the forward multiple would still be relatively cheap at 12.3-times the consensus EPS.