Supercomputers are no more just things from sci-fi films. They are increasingly becoming a part of our everyday life. Each day, huge amounts of data are produced. This data needs to be processed and stored. One of the companies that specializes in supercomputers is Cray Inc. (NASDAQ:CRAY). Cray makes and operates supercomputers, and provides storage and Big Data solutions. The company’s first quarter report was not received well by investors. Since then, stock price has stabilized, and it’s tempting to investigate whether Cray is a “buy” or not.
Want went wrong?
The earnings report itself was not scary at all. Cray Inc. (NASDAQ:CRAY) has reported that product margin was 24% and service margin was 50%. Product margin was negatively impacted by the weakening of the Japanese Yen. Cray stated that it performed well on the tempting Japanese market, but the Yen has dropped 18%. Products accounted for a 75% of total revenue, while services had a 25% share of total revenue. Cray Inc. (NASDAQ:CRAY) has reaffirmed its revenue guidance for the year 2013. The company expects revenue to be $500 million. Forty-five percent of the annual revenue is expected to come in the fourth quarter.
The nature of the business
Cray’s revenue depends on a small number of large transactions. Cray develops big systems that cost a lot, and take time to implement. This is why it is normal that the company’s quarterly revenue jumps like a rabbit. This fact is important to remember when thinking about investing metrics like P/E. Current P/E could not be relevant because it may include some big transaction that happened a couple of quarters ago. Cray’s current P/E is less than five, thanks to one-time $140 million payment from Intel in the second quarter of 2012.
In March, Cray was awarded a $32 million contract with the Swiss National Supercomputing Centre to upgrade and expand its Cray XC30 supercomputer. The company’s revenue is dependent on such contracts. Cray XC30 is the company’s flagship product. It is well received by the market, and Cray puts a lot of hopes on this platform.
Competition
Silicon Graphics International Corp (NASDAQ:SGI) is the other company that is focused on supercomputers. The company’s first quarter results have beaten estimates by 29%. Its stock is up more than 40% year-to-date. Silicon Graphics International Corp (NASDAQ:SGI) is active on the storage and big data field too. It is trading with a forward P/E of 14, while Cray has a forward P/E of 30. However, the nature of the business makes it hard to predict the number of contracts that a particular company would earn, so revenue and earnings estimates are often adjusted. Silicon Graphics is expecting to deliver earnings of $0.30 per share on revenue of approximately $775 million in 2013. Last year, the company delivered earnings of $0.12 per share on revenue of $753 million. This increase in profitability would certainly be good for the stock. Analysts are expecting even more from Silicon Graphics. Their mean earnings estimate for 2013 is $0.32 per share. While the stock has already performed well this year, it has more room to grow. The next quarterly report could be the tipping point for the stock.
Gigantic companies like International Business Machines Corp. (NYSE:IBM) are in the game too. IBM’s most famous supercomputer is Watson. Currently, Watson’s main implications lie in the healthcare and finance industries. Finance is a very attractive field for supercomputing companies. Bank data grows an average of 20%-30% per year. In its earnings call, Cray was very pleased to announce that it had secured its first financial industry contract ever. IBM is such a behemoth that supercomputing is not a big part of it. The company is trading at 14.19 P/E and 11.21 forward P/E. IBM pays 1.85% dividend. While the valuations are attractive and the dividend is solid, International Business Machines Corp. (NYSE:IBM) is so massive that it would be hard for the stock to appreciate at a good pace. The stock has underperformed the S&P 500 this year, and I think that this trend will continue.
Conclusion
The world is changing fast, and it needs data and computing for this change. This trend would be crucial for specialized companies like Cray and Silicon Graphics. Cray is well positioned to profit from the world’s needs. It has zero debt. It has powerful products to suite consumer needs. The Big Data segment of Cray’s business is yet to evolve. In its earnings call, the management has stated that Big Data is only a fraction of Cray’s revenue, but they are working on it. In my opinion, the tide would lift all boats that are ready to swim. Cray is ready.
The article Time To Bet On Cray originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
