We recently compiled a list of the 10 Worst Affordable Tech Stocks to Buy According to Short Sellers. In this article, we are going to take a look at where SMART Global Holdings, Inc. (NASDAQ:SGH) stands against the other affordable tech stocks.
The rapid advancements in Al, computing, and human-machine interaction are the critical drivers for global companies’ strong adoption of technology. Garner believes that agentic Al is expected to emerge over the next 2-3 years – with capabilities going beyond tasks such as summarizing information to taking action. While Al is being used to provide options to the users, this technology will be able to choose the option that is optimal for the user. Therefore, the most important use cases for Al in 2025 will involve the relationships between humans and machines.
The technology domain involves substantial innovation, ranging from groundbreaking Al and Machine Learning advancements to the transformative potential of blockchain and loT. Industry veterans believe that next year should be a transitional one for the generative Al as technology companies will focus on experimenting and finding applications that can help drive efficiency and productivity.
Global Growth with the Help of Cloud, Al, and Cybersecurity
The elevated interest rate environment, concerns regarding recession, and geopolitical challenges led to the slight weakening of global technology spending in 2023. Now, experts are seeing a light on the horizon.
Economists have become more optimistic about the US economy, for the tech sector specifically. Due to strong adoption trends of Cloud and Al, global analysts are now optimistic about a potential return to modest growth in 2024, with stronger prospects for 2025.
Deloitte believes that global IT investments should be aided by double-digit growth in spending for software and IT services in 2024. There are expectations that public cloud spending might see an increase of more than 20%, with stronger demand for cybersecurity. Al investment (not specifically about generative Al) should also contribute to overall spending growth. Economists continue to project that Al-related investments might touch $200 billion globally by 2025, led by the US.
Market experts believe that cybersecurity should play an important role in the comeback. Deloitte recently highlighted that analysts continue to project low double-digit growth in global spending on security and risk management from 2023 to 2024. Adoption should be fueled by the persistent threat landscape, ongoing cloud adoption, the emergence of generative Al, and data privacy and governance regulations.
On the software front, Deloitte projected that nearly all the enterprise software companies will be embedding generative Al in at least some of their products in 2024 and that the revenue uplift (for such companies and cloud providers of gen-Al processing capacity) should approach a US$10 billion run rate by the year-end. On the hardware front, Deloitte believes that the uplift for chips and servers executing generative Al should exceed US$50 billion in 2024.
Technology Trends Defining the Future
The major technology trends are expected to create opportunities, result in innovation, and become imperative to gain a competitive edge in the business world. While AI and ML continue to top the list of tech trends likely to dominate the future, experts believe that Robotic Process Automation (RPA), Blockchain Technology, Industry Cloud Platforms, and Machine Customers are also on the list.
RPA helps organizations to transition to dynamic norms of automating organizational repetitive tasks with effectiveness and high precision. It revolves around employing software robots that perform tasks, like entering data and other related tasks, exactly like humans. Infosys believes that the global RPA market should touch ~$13.74 billion by 2028, reflecting a CAGR of 32.8%. With leading companies reaching the end of the learning curve, the full benefits of RPA are becoming visible. The exponential requirements for automation, a target of increased productivity, and lower operational costs should act as growth drivers.
Next, machine customers refer to AI systems that are empowered to make purchase decisions and have autonomous communication with a business. The technology leverages the options, data, and algorithms to think and transact. As per Gartner, CEOs expect that ~15% – 20% of their revenue should come from machine customers by 2030. The potential to convert billions of machines into customers offers opportunities worth trillions.
Our methodology
To list the 10 Worst Affordable Tech Stocks to Buy According to Short Sellers, we used a Finviz screener to filter out the stocks in the technology industry and we chose the ones having high short interest. Next, we narrowed our list and chose the stocks that are trading at less than the forward earnings multiple of ~22.53x (since the broader market is trading at ~22.53x, according to WSJ). Finally, these stocks were ranked in ascending order of their short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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SMART Global Holdings, Inc. (NASDAQ:SGH)
Short % of Float (As of 30 August 2024): 15.95%
Forward P/E as of 23 September 2024: 9.67x
SMART Global Holdings, Inc. (NASDAQ:SGH) is a memory-focused company, which is engaged in the designing and development of enterprise solutions in the US and internationally.
Short sellers believe that SMART Global Holdings, Inc. (NASDAQ:SGH)’s strategic pivot towards AI solutions comes with numerous risks, which might weigh over the performance in the near term. They believe that higher R&D investments, needed to compete effectively in the AI space, might impact its profitability. Moreover, the supply chain constraints and extended lead times for components are some of the additional challenges that might weigh over SMART Global Holdings, Inc. (NASDAQ:SGH)’s gross margins.
That being said, Wall Street analysts believe that SMART Global Holdings, Inc. (NASDAQ:SGH) should be aided by its conservative strategy and efforts to strengthen its Services business. SMART Global Holdings, Inc. (NASDAQ:SGH) continues to focus on the growth of its AI infrastructure, with high-density memory solutions targeted at AI workloads in development. Its transition from a memory module organization to a company that is focused on AI infrastructure and high-performance computing should aid in long-term client relationships and service expansion.
Market experts opine that the company is a leader in HPC implementation for AI, a market that has strong market opportunities. There are expectations that the company’s efforts to enhance its go-to-market strategy might gain some traction.
In 3Q 2024, SMART Global Holdings, Inc. (NASDAQ:SGH)’s gross margin increased to 29.6% as compared to 29.2% in the same period in 2023 mainly because of a favorable mix from higher service revenue in the IPS business. For 4Q 2024, the company expects net sales of ~$325 million (+/- $25 million) and a gross margin of ~29.5% (+/- 1.5%).
Rosenblatt Securities reissued a “Buy” rating on the shares of SMART Global Holdings, Inc. (NASDAQ:SGH), setting a price target of $35.00 on 3rd July. In 2Q 2024, 27 hedge funds had investments in the company. Meridian Funds, managed by ArrowMark Partners, released its first quarter 2024 investor letter. Here is what the fund said:
“SMART Global Holdings, Inc. (NASDAQ:SGH) is a diversified technology company with leading market positions in memory, LEDs, high-performance computing (HPC), and the Internet of Things (IoT). Our interest was piqued when the company hit a rough patch in 2019-early 2020 as several factors led to an earnings decline. Volatility in its memory business caused by weakness in Brazil, new product investments the company had made ahead of revenue, and order delays in its HPC business all converged. While none of these developments are particularly unusual, it is uncommon for all three to turn negative at the same time. Our thesis was that the company’s impressive new management team could not only smooth out some of the volatility in the business but also drive growth through superior capital allocation and organic investment. With the stock trading at less than 8x earnings at the time of our investment (Q3 2020), we believed the risk/reward was excellent. The stock was strong in the quarter due to positive earnings results and guidance. The memory business appears to be in a cyclical upturn within a strong long-term secular growth trend driven by increased memory content in everything from phones to data center equipment to cars. Smart Global remains a leader in HPC implementation for AI, a market that remains strong, and there is anticipation that the company’s efforts to enhance its go-to-market strategy should gain traction. We believe the long-term risk/reward is still strong and maintain a large position in the stock, though we reduced our position during the quarter as part of our regular risk management process.”
Overall SGH ranks 7th on our list of the worst affordable tech stocks according to short sellers. While we acknowledge the potential of SGH as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than SGH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
