On Wednesday, Needham maintained a Buy rating on Penguin Solutions (NASDAQ: PENG), but reduced the price target to $25 from the previous $35. The adjustment follows Penguin Solutions' quarterly earnings miss and a forecast for fiscal year 2025 that did not meet analyst expectations. The delay in Integrated Power Solutions (IPS) deliveries was cited as the main cause for the fourth-quarter shortfall. However, this segment is still expected to contribute significantly to the company's revenue and profit growth through fiscal year 2026.
The firm's management is seen to be making the right decisions to guide the company forward, with expectations of ongoing operating margin (OM) expansion. Penguin's recent win in the gaming sector indicates further diversification of its customer base. Additionally, the memory segment is showing signs of improvement, which could be further bolstered by advancements in Compute Express Link (CXL) technology.
Despite the reduction in revenue projections for fiscal years 2025 and 2026 by $50 million, and a slight decrease in gross margin (GM) by 50 basis points, operating expenses (OpEx) have been adjusted downwards. The new price target of $25 is based on a 12 times multiple of the revised fiscal year 2026 earnings per share (EPS) estimate of $2.05. With the stock currently trading at less than 9 times the firm's fiscal year 2026 EPS forecast, the analyst sees a favorable risk-reward balance for investors.
The report suggests that while investors might be concerned about the slower growth trajectory, the strategic moves by Penguin Solutions are akin to its namesake's efficient waddling, indicating steady progress despite the challenges.
In other recent news, Penguin Solutions reported Q4 earnings that fell short of analyst expectations and provided a weaker fiscal 2025 guidance than anticipated. The artificial intelligence infrastructure and computing solutions provider posted adjusted earnings per share of $0.37 for Q4, missing the projected $0.40. Moreover, the company's revenue of $311 million was lower than the consensus estimate of $325 million.
For the full fiscal year 2024, the company's revenue was $1.17 billion, a decrease from $1.44 billion in fiscal 2023. Penguin Solutions' non-GAAP EPS for the year was $1.25, a notable drop from $2.52 in the previous year. In terms of future forecasts, the company anticipates fiscal 2025 EPS of $1.50-$1.90, falling below the analysts' expectation of $1.92.
The company also projects a fiscal 2025 revenue of $260-290 million, indicating a potential 15% YoY growth plus or minus 5%. Despite these developments, CEO Mark Adams expressed satisfaction with the Q4 results, emphasizing the company's commitment to solving the complexities of AI infrastructure.
InvestingPro Insights
To complement Needham's analysis of Penguin Solutions (NASDAQ: PENG), recent data from InvestingPro provides additional context for investors. According to InvestingPro Tips, Penguin Solutions has demonstrated profitability over the last twelve months, which aligns with the analyst's positive outlook on the company's future earnings potential. This profitability is expected to continue, as analysts anticipate the company will remain profitable this year.
InvestingPro data also reveals that Penguin Solutions' stock price has fallen significantly over the last three months, which may present an opportunity for investors who agree with Needham's favorable risk-reward assessment. This price movement correlates with the analyst's reduced price target but still suggests potential upside from current levels.
Another InvestingPro Tip indicates that Penguin Solutions' liquid assets exceed its short-term obligations, which could provide the company with financial flexibility as it navigates the challenges mentioned in the earnings report, particularly the delays in IPS deliveries.
For investors seeking a more comprehensive analysis, InvestingPro offers 8 additional tips for Penguin Solutions, providing a deeper understanding of the company's financial health and market position.
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