Target price is 59,000 won… Where is this company that SKT bet 280 billion on?

A Penguin Solutions employee inspecting the server. Captured from the Penguin Solutions website, the Wall Street target price consensus for Magnificent 7 (M7) stock (average of securities company estimates compiled by LSEG) is up to 17.76% (Microsoft) higher than the recent closing price. However, among the artificial intelligence (AI) companies that Goldman Sachs recently published its first report and began analyzing, there is a stock whose target price consensus is nearly 40% higher than the recent closing price. This means that the upside potential is about 20% higher than that of M7 stocks. What kind of sport is it?

Goldman: “Stock price has 40% upside potential”

Server managed by Penguin Solutions. Captured from the Penguin Solutions promotional video This stock is Penguin Solutions (PENG), a company that builds AI solutions for enterprises. The consensus target price for this stock is $42.4, which is 39.43% higher than the recent closing price. The target stock price set by Goldman Sachs is $21, and the securities firm estimates that there is room for a 20.0% increase.

PENG is where SK Telecom invested $200 million (approximately 280 billion won) in convertible preferred stocks (stocks that are currently preferred stocks but can be converted to common stocks after a certain period of time) worth $200 million (approximately 280 billion won) last July. SK Telecom said at the time, “If we convert all the acquired convertible preferred stocks into common stocks, we can secure a 10% stake.” This investment was the largest AI investment SK Telecom has made to date.

The reason Goldman Sachs decided to include PENG in the scope of analysis was because it judged that this company was likely to grow along with the growth of the AI ​​industry in the future. Michael Ng, an analyst at Goldman Sachs, said, “PENG’s existing light-emitting diode (LED) and memory semiconductor businesses are subject to strong economic cycles, so there are times when performance is in a downturn.” He added, “The demand for building generative AI infrastructure, which has recently increased significantly, is driving the existing business.” “It will be enough to make up for the decrease in sales.”

Managing Meta’s ‘AI Infrastructure Cluster’

NVIDIA DGX on Meta managed by Penguin Solutions. Captured from the Penguin Solutions website PENG’s AI solution construction business involves creating and managing an infrastructure that combines graphics processing units (GPUs), data centers, and servers upon request from companies providing AI-related services. Service providers can build this solution themselves, but if using PENG has advantages in terms of technology and cost, they will outsource the work.

In fact, PENG manages ‘NVIDIA DGX’ at Meta, one of the M7 companies. NVIDIA DGX is a subscription service that allows companies to utilize the computing power provided by NVIDIA without having to purchase GPUs directly. “When we worked with PENG to improve the AI ​​Research Supercluster (RSC) last year, system availability was consistently above 95%,” Mehta said. “This was no easy task.”

Performance upgrade from the previous fiscal year

Analyst Ng said, “PENG has accumulated experience designing and building high-performance computing projects for 25 years since the company was founded,” and added, “Based on our existing experience, we will be able to demonstrate competitiveness in the AI ​​solution construction business.” . He said, “Thanks to these AI-related businesses, PENG’s sales are expected to grow at an average annual rate of 13% over the next five years (2024-2029),” and “profitability is also expected to gradually improve.”

In fact, PENG’s performance appears to be growing steadily, although it has fluctuated recently. The company’s operating profit for fiscal year 2024 (September 2023 to August 2024) recorded $848 million, turning into a surplus from $7 million in the previous fiscal year. It is expected that operating profit will reach $158 million in fiscal 2025, a significant decrease compared to the previous year. However, the future trend is not bad, with $198 million in fiscal 2026 and $248 million in fiscal 2027. Considering that operating profit was negative or tens of millions of dollars until fiscal year 2023, it appears that performance has upgraded from the last fiscal year.

Stock prices are slowing, but the attractiveness of undervaluation is growing

PENG’s stock price has not been good recently. This stock announced in the middle of last month that it had “sales of $311 million from June to August of this year,” but because this performance was 4.3% lower than the consensus, its stock price plummeted 23.47% in one day on the 16th of last month. . However, operating profit during this period was $233 million, much better than the consensus ($36 million). Profitability has improved, but stock prices have fallen, improving valuation (stock price relative to performance). PENG’s 12-month forward price-to-earnings ratio (12M PER) was 9.37 times as of the 8th, and is undervalued compared to M7 stocks, which are over 20 times.

There’s one more piece of good news. Did you know that when a company’s executives and employees who know the company’s situation best buy its own stock, it is interpreted as a good signal for the stock price to rise? PENG’s executives and employees, including President Mark Adams, currently own shares worth $33 million (approximately 45.4 billion won), and no executives or employees have sold their shares over the past 12 months.

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Reporter Yang Byeong-hun hun@hankyung.com