First, to recap its Q1 results, EPS came in at $1.05, which was well above its own guidance of $0.90-$0.93, with revenue spiking by 67% to $265.4 million, also handily above its $255-$260 million projection. So, not only is the Street having trouble catching up to the company, but, so to is the company itself it seems.
There are a few items that really stand out about its performance. First, revenue growth is accelerating accelerating, which is somewhat rare for a tech IPO. Oftentimes when a company goes public, it will do so near the height of its growth. Not the case with SGH, as revenue growth has improved from 38% in 3Q17, to 53% in 4Q17, and then 67% this quarter.
The company is benefiting from a mix of growth drivers, For instance, the Brazilian economy continues to heal and recover following several years of turmoil. Globally, the memory market as a whole is also very healthy as smart devices continue to add more features and functionality, requiring more complex and efficient chips. But, most importantly, the Brazilian government has mandated higher memory content within smart phones in the country, as it significantly lags behind much of the world in this regard at 16GBs. As the primary manufacturer of chips in Brazil, this has had a huge impact on its business, and it should be a major catalyst in 2018 and perhaps 2019 as well.
Another bullish metric for SGH is that gross margin continues to expand. This quarter, it came in at 21.8%, up from 4Q17's 21.5%, and up sharply from the year ago period at 18.6%. As the company grows, it is gaining efficiency of scale. This is creating strong growth across the board in terms of profitability. For Q1, operating income rocketed by 775% to $31.5 million, net income improved to $21 million from ($3.2) million, and cash flow from operations surged to $14.3 million compared to a cash burn of ($17.0) million in the year ago period.
And for SGH, there is no slowdown in sight. It guided for Q2 EPS of $1.30-$1.36 vs. the $0.91 Capital IQ Consensus with revenue of $280-$300 million vs. the $253.6 million consensus. At the mid-point, this would equate to year/year growth of 68%, continuing its upward path of topline growth rates.
To wrap up, SGH is clearly hitting on all cylinders, but yet, is a name that still might not be on many traders' radars. Furthermore, in addition to the impressive growth, SGH remains very cheap with a 1-year forward P/E of 7.5x. Therefore, despite the stock's exceptional performance since its IPO, the risk/reward remains very compelling, in our view.