SGH (NASDAQ: SGH) share prices have been on a wild ride for the last two years, moving sharply higher and lower, and are heading higher now. The difference is that transformation efforts are taking hold, and the company is setting up for long-term success. There are still hurdles to overcome, including end-market normalization, which still impacts core segments, but a return to growth is expected. The takeaway from the Q1 results is that margins are widening due to the transformation effort and will provide investors leverage once end-market normalization is complete. 

"We are pleased with the progress we are making on our transformation journey, marked by the strategic divestiture of our Brazil business and another quarter of record non-GAAP gross margins reflecting the continued shift to higher value enterprise solutions," commented CEO Mark Adams. 

SGH makes smart transformation

SGH's transformation focuses on diversification, high-margin technology, and services, with services making up a significant portion of the Q1 revenue. The bad news is that end-market normalization and long lead times cut revenue by 30% compared to last year. The top line is also weaker than expected but offset by significant margin improvement that is expected to stick and improve when top-line growth aids leverage. 

Segmentally, the Memory and ISG segments contracted by 22%, excluding the impact of the Brazil divestiture. The Cree LED segment, about 25% of the business, grew by 5.6% and is expected to continue growing this year. Services, the highest-margin business, was also 25% of the take and will likely remain strong as digitization continues globally.

Regarding the margin, the company reported a 200 basis point improvement in adjusted gross margin that put the AGM at record levels. The gross margin improvement carried through to the bottom line, leaving the adjusted EPS at $0.24 or $0.08 better than expected. Guidance for the next quarter is also favorable and includes a top and bottom line forecast above the Marketbeat.com consensus. 

The long-term outlook is robust. The company is expected to post 25% revenue growth and significant earnings improvement in 2025. Earnings are expected to more than double, and this forecast could be weak given the outlook for AI and a memory-chip supercycle that is only in the earliest innings. 

SGH has a solid balance sheet: raises repurchase authorization

SGH's move to divest Brazil unlocked tremendous shareholder value. Along with the margin improvement, the company's cash position is the largest on record, and debt is down. The net result is a near-doubling of shareholder equity that may not be soon eroded. Cash will be used to invest in new technologies and growth avenues, including AI, which should provide long-term growth and shareholder value over time.

The repurchase program was authorized at $75 million, making $150 million over the last two years. The new authorization is worth nearly 8% of the market cap and is a significant tailwind. 

Analysts help lift SGH share prices

Analysts' activity in SGH shares has been tepid for the last quarter, but there are some telling details. The first is that the consensus of analysts tracked by Marketbeat.com is Buy. The 2nd is that the stock trades below the analysts' lowest price target, suggesting a deep value; the consensus assumes about 40% of upside is available. The third is that the freshest target was set following the Q1 release, including a 10% increase that lifts the low end of the range. The takeaway is that SGH's sell-off in 2023 was overblown, and the updraft in 2024 has room to run. 

The technical outlook is a little sketchy. The market has rallied sharply to confirm support at the bottom of the trading range, but the move may be played out. The market struggles with resistance at the mid-point of the range that may cap gains in Q1. This stock may move sideways or fall to support before the Q2 release is issued in that scenario. If not, this market moves above resistance and could advance into the $24 to $28 range.