For Immediate Release
Chicago, IL – November 10, 2021 – Zacks Equity Research Shares of SMART Global Holdings, Inc. (
SGH Quick Quote SGH - Free Report) as the Bull of the Day, Zillow Group, Inc. ( ZG Quick Quote ZG - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Advanced Micro Devices, Inc. ( AMD Quick Quote AMD - Free Report) and Xilinx, Inc. . Here is a synopsis of all four stocks: SMART Global Holdings is the under-the-radar semiconductor stock you’ve been looking for, with its broadening portfolio of cutting-edge chips that are poised to take flight in this commencing technological renaissance.
SGH is roaring out of the shadows with an ambitious growth strategy that won't remain under the radar for much longer. Now is the time to add this hidden gem to your portfolio before the broader investing world catches wind of this discounted chip winner.
SMART Global has been around since the late 80s, but it wasn’t until Mark Adams took the helm amid the pandemic last year, that this chip-maker’s upside potential went through the roof. Adams is transforming this once complacent memory-focused legacy tech company into a motivated innovative leader.
Adams was the leader force behind SGH’s quick strategic acquisition of Cree’s niche LED chip business at the peak of pandemic fear for a steal at $300 million. Cree LED’s synergies are already paying dividends as it drives margin expansion, improves the firm’s capital & operational efficiency, and provides critical industry relationships.
SMART Global’s new forward-thinking chief has already vastly improving its operational performance and is ramping up R&D spending to ensure that the enterprise remains ahead of the innovative curve.
Analysts are getting increasingly bullish on this under the radar comeback play as SGH flips the switch on accelerating profitable growth, knocking estimates out of the park by an expanding percentage over the past 3 quarters. Zacks Consensus EPS Estimates for SGH’s have been soaring across all time horizons driving the stock into a Zacks Rank #1 (Strong Buy) and all 5 covering analysts agree on the unique value opportunity here.
SMART Global Holdings had been a reliable pure-play memory leader in the chip space for over 30 years before deciding to broaden its product portfolio, which appeared to be catalyzed by activist investors following SGH's 2017 IPO. The company has since executed 4 strategic acquisitions.
Penguin Computing was SGH's first vital acquisition ($85 million price tag) back in 2018, adding a broad portfolio of leading next-generation products, including high-performance computing (HPC), cloud computing, hyperscale data centers, and the development of artificial intelligence (AI). This segment has exploded since its acquisition as its AI-focused products experience budding demand.
In the summer of 2019, this resourceful chip giant acquired Artesyn Embedded Computing and Inforce Computing for $80 million and $12 million, respectively. Artesyn (which is now called SMART Embedded Computing) provides critical data center architecture used in "industries such as telecom, military and aerospace, medical, and diverse automation and industrial markets," according to its website.
SMART Wireless Computing (formerly known as Inforce Computing) exposes the enterprise to cutting-edge technologies like "medical imaging, collaboration/videoconferencing, wearable hands-free computing, and robotics/unmanned aerial vehicles," according to its investor relations page.
SMART's diverse set of growing end-market demand provides the company with an enormous total addressable market (TAM), significant upside potential, and not to mention an excellent hedge against the cyclical nature of the semiconductor market.
SMART Global was able to more than double its profits in FY2021 (ending August 27th, 2021) on rapidly expanding margins and accelerating sales growth, which reached record levels this past quarter.
The 11x forward P/E that SGH is currently trading at is a remarkably discounted valuation multiple for a high-growth semi business that is expected to exhibit consistent 20%+ earnings growth in the years to come.
The digitalizing impact of the global pandemic didn't just pull forward demand but propelled economic adaptation of advancing technology a decade ahead. Digital chips are at the core of all technology. This sector is on a prolific growth trajectory (characterized by Moore's Law) that will generate outsized returns for the best-positioned equities in the space.
The backbone of rapidly advancing digital technology, semiconductors, have been on an absolute tear since mid-October, with the VanEck Vectors Semiconductor ETF, the go-to benchmark for the chip space, having rallied over 20% in less than a month. The most advanced computing chips have received the largest bid as investors look past short-term supply chain hiccups and towards the insatiable demand for next-generation tech.
With its fresh innovation-oriented operational outlay, Mark Adams at the helm (with a now proven track record of skilled management), and an industry-wide outlook of accelerating growth, the future SGH has never been brighter.
Zillow Group has been under significant pressure since it peaked in mid-February, with its latest earnings report at the beginning of November spelling tragedy almost every way you look at it. ZG has lost nearly 70% of its value in the past 9 months, and analysts are still bearish on this ostensibly mismanaged homebuying application as earnings estimates for the next couple of years drop precipitously, pushing Zillow into a Zacks Rank #5 (Strong Buy). Overleveraged Operations Reveal Careless Management Team
Zillow missed big on both its top and bottom-lines in its Q3 earnings report released November 2nd exhibiting its most significant quarterly loss to date. As the booming housing market cooled off this past quarter, the company accumulated a massive $422 million loss in its Zillow Offers segment (digital house flipping) as it buys too much too fast. Offers' one-quarter loss almost double its total 2020 losses.
This led to management's abrupt move to completely exit the iBuying game (aka Zillow Offers). Zillow's co-founder & CEO Rich Barton cited the volatility and unpredictability of forecasting home prices as the primary reasoning for winding down Zillow Offers.
This significant operational shift came out of left-field, with the prior quarter's report highlighting the success of the Zillow Offers division. This digital real estate giant's AI-powered software for buying and selling homes was overpaying for thousands of homes, leading to this sudden business transformation. Zillow announced that it would be cutting its staff by 25% (roughly 2,000 employees) to pare future losses and will be off-loading the nearly 10 thousand homes currently in its inventory in the coming quarters (likely for a loss).
It's ironic actually because when Zillow Offers was initially announced that its plans to enter the iBuying business in 2018, most of its investors ran for the, cutting the price of ZG in half that year. The digital house flipping game is risky because of the extreme amount of leverage required to execute the level of real estate ownership Zillow had eventually come to.
However, Zillow Offers began showing a robust trend towards profitability amid the pandemic and revealed positive returns in its prior 3 quarterly reports (Q4 2020 to Q2 2021). Investors had begun getting optimistic about the opportunity in this house-flipping market as residential real estate prices across the country continued to skyrocket, and ZG's proprietary model had seemingly proven itself.
Ultimately, Zillow overleveraged its house-flipping operations, which I attribute to the management team's blind greed, leading to the stock's eventual capitulation. Its Q3 balance sheet revealed that its credit facility borrowing had ballooned 300% in just one year to $2.67 billion, not to mention its total liabilities have nearly doubled. At the same time, its volatile housing inventory exploded with a constant stream of apparently overvalued purchases driving this asset line item's total value to $3.76 billion, 7.7 times its inventory from a year prior.
There is no doubt that Zillow overextended itself in the iBuying space, and now it's paying the price.
Zillow was far from the only iBuying real estate player out there, with start-ups like Opendoor and Redfin engaging in similar business lines. RDFN's share performance is almost an exact mirror image of ZG, while OPEN appears to be the outperformer. We will see if Opendoor can maintain its relative outperformance following its earnings after the bell this evening.
Investors were slowly walking out the door following the frothy, nearly $50 billion valuations that ZG got to in February. However, now that the stock's most significant topline driver (finally demonstrating positive returns in recent quarters) is being completely pulled off the table, shareholders are sprinting for the exit, while analysts downgrade ZG like there is no tomorrow for this company.
ZG is already down 36% month-to-date in just a week and a half of November trading we've seen thus far.
The Pollyanna of market-disrupting innovators, Cathie Wood, has even been dumping ARK Invest's ZG stake as management illustrates a lack of competence this past quarter. ARKK has sold out of 83% of its Zillow position following the dreadful Q3 report at the beginning of the month. With dip-buying money managers like this jumping ship, I wouldn't be touching this stock.
Analysts have dropped price targets across the board, with some taking their once lofty projected targets down below its already capitulated price tag. I'm not recommending you short this unpredictable stock, but I would avoid it until its management team can get their ducks in a row.
Additional content: AMD Shares Are Very Expensive, but Should You Ignore the Opportunity?
It isn’t just the new products or the deal with Meta Platforms at its Accelerated Data Center conference that makes
Advanced Micro Devices stock interesting. It’s more about what this kind of news tells us about the company and its superwoman CEO Lisa Su.
Today AMD looks very much like a company that is doing everything right to ensure continued growth for years to come. So although it’s already extremely well positioned with its current technology, management continues to push the envelope on delivered performance.
So on a single day, management could talk about brand new MI200 series accelerators for high performance computing (HPC) and artificial intelligence (AI) workloads; preview its Gen 3 EPYC processors; and offer additional information on its next-gen Zen 4 processor while announcing the Zen 4c (next) version for data centers.
Moreover, AMD’s strategy has come to fruition at a time when the market is expanding very rapidly because of much broader semiconductor application across sectors, renewed strength in the traditional PC, data center, cloud and gaming, as well as strong demand coming from AI and machine learning. The pandemic also served to expand the market because operating flexibly from different locations has become much more acceptable, thus increasing the scope and scale of computing requirements.
Of all these, the PC market is the one likely to slow down or possibly flatten next year, coming off two years of stellar growth and still grappling with supply chain issues that could take a few quarters to iron out. But Lisa Su remains optimistic about AMD’s prospects in this environment as well, because PC users are huge in number and growing, and also because of the possibility of taking further share from market leader Intel on the back of its superior technology.
Management expects to close the
Xilinx acquisition by year-end, which will further improve its prospects.
Management strategy seems focused on matching the needs of the world’s largest hyperscalers since these are the folks in need of the most compute power. The ability to satisfy them is a testament to the company’s prowess. And that’s why the Meta deal is so huge for AMD. Actual deployment could be gradual and take shape only as the company’s metaverse concept comes into reality. But the fact that AMD was chosen is the really big deal.
And it comes on top of its existing engagements with AWS, Azure and Google Cloud; its notebook wins at Acer, Asus, Dell, HP, Lenovo, etc., and of course its wins at Xbox and PS.
No wonder the company continues to increase guidance – it now expects revenues to increase 65% this year! However, cash flows are still much lower than most of the big tech companies, so it must continue to execute.
So the investment case in favor of AMD boils down to its industry-leading products, a conducive, fast-expanding market with scope for share gains, and a strategic acquisition that’s about to close.
The case against is the valuation, which at 47.06X earnings is more than double the S&P 500’s 22.19X and higher than its own median level.
However, it’s worth noting that analysts currently expect AMD’s 2021 revenue and earnings to grow 65% and 105%, respectively, which will be followed by a respective 18% and 24% growth in 2022. The industry is expected to grow earnings 27% this year and 21% in the next while the S&P 500 is expected to grow 64% this year and just 10% in the next. So, AMD’s higher valuation seems to be coming from its superior growth profile.
The strong growth prospects make this one of the few companies worth buying and holding for the long term, despite its lofty valuation. And that’s why the shares carry a Zacks Rank #2 (Buy).
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