Penguin Solutions - not a typical Saul stock, but worth a look?

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First thread I’m starting here, so go easy on me :slightly_smiling_face:

I’ll say up front this isn’t a classic Saul-style company. Gross margin is in the high 20s, there’s debt, it’s a mix of three businesses, and a lot of the growth comes from memory pricing. But the growth just turned sharply and I didn’t see a thread on it, so I’m curious what others think.

Penguin reported fiscal Q4 on Oct 6:

  • Revenue $567M, up 68% YoY (Q3 was +48%, first half was roughly flat)
  • FY26 revenue $1.73B, up 26%; non-GAAP EPS $2.87, up 51%
  • FY27 guide about $2.43B, roughly +40%

The catch is where the growth comes from. Integrated Memory was $341M, up 158%, and is now about 60% of sales. Advanced Computing, the AI infrastructure business they want to be known for, was $154M and only up 11%, and down 14% for the full year because of the Penguin Edge wind down and lower hyperscale sales. The part they’re excited about, non-hyperscale AI infrastructure (enterprise, sovereign, neocloud), nearly doubled and is now two thirds of that segment, so there’s something real growing underneath.

The bull case as I see it: memory demand stays tight for a while, and by the time it cools, the AI infrastructure business is big enough to carry growth. They raised the FY27 Advanced Computing outlook from mid-teens to about 40% in one quarter, which helps that argument.

The bear case: it’s mostly a memory-cycle stock with low margins, and those businesses usually get valued that way once pricing turns. Two details from the release lean that way. The CFO said Q4 gross margin improved because memory got more profitable, partly offset by lower Advanced Computing margins, so the AI side isn’t carrying profits yet. And non-GAAP diluted shares went from 52.8M in Q3 to 62.0M in Q4, which I assume is tied to the convertible notes they issued in July. Worth keeping in mind before valuing it on EPS.

The thing I keep coming back to is how much of the memory growth is price versus volume. If it’s mostly price, the numbers could fade fast once the cycle turns, and then it comes down to whether the AI infrastructure business is big enough by then. Curious if anyone has a read on that.

No position. Mostly trying to decide if it belongs on my watchlist.

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Hey Wilson, I am trying to look into Penguin and just getting distracted. That is not a ding on your report, but says a lot about what I am finding for research. The ~20% margins is relatively low for those of us who invested through the SAAS days, and well, it’s ok. This is mostly a hardware company which also limits it’s ability to get that gross margin higher.

Their investor presentation shows a step called “Manage” on slide 11…but I don’t see a product for that. Later on slide 22 they break out “services” as 251M and that’s about 16% of revenue for the FY. Since they predict their own margin dropping by 2% for fy27 that implies that services are not going to grow? It would be nice to see if they are leaning into anything that is reoccuring, but I cannot find it.

With the bit of research I could do, it seems like a good trend play, but not really differentiated enough to catch my eye.

(This is not as good a response as others on the board can do, but it how I go about deciding if I want a stock on my radar and possibly open a trial position. This one feels like it would need more monitoring that I am willing to do.)

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Wilson,

My main concern is that they are significantly behind every other memory player in seeing revenue increase. Which to me feels like they are just a boat going up with the tide.

Drew

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@drew1618t Are you looking at Penguin strictly as a memory investment, or have you considered its AI infrastructure operations business? Because I agree the memory segment alone probably isn’t the most compelling reason to own it.

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Fair points. On the “Manage” side, they do have ClusterWareAI, which they use to monitor and manage GPU clusters. Management also mentioned that their managed services contracts typically run 3 to 5 years.

What caught my attention were the recent neocloud wins. They’re not just supplying hardware, they’re also helping run these clusters over multiple years. Non-hyperscale AI infrastructure revenue grew 99% in Q4, so there’s clearly some traction there.

I wouldn’t necessarily take the lower FY27 margin guidance to mean services won’t grow. Memory and hardware are growing much faster, which could pull down overall margins even if services improve.

Services revenue did decline 11% last quarter, mainly because older hyperscale projects wound down, partially offset by growth in newer AI managed services. They also don’t break out recurring software revenue or services margins, so it’s hard to know how valuable that part of the business really is.

That’s what I’m interested in watching. If these new projects start bringing in meaningful recurring revenue, there may be more than the memory cycle. Otherwise, I agree it’s mostly a hardware play.

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Wilson,

I see their AI (Advanced Compute) growing 11% Year-over-year. I find the other sectors seems to be less of a compelling reason.

Penguin Solutions (PENG) – Quarterly net sales by segment ($M) and YoY growth, fiscal 2026

Segment Q1 FY26 YoY Q2 FY26 YoY Q3 FY26 YoY Q4 FY26 YoY
Integrated Memory 136.5 +41.2% 171.6 +63.1% 275.1 +111.4% 340.8 +157.9%
Advanced Computing 151.6 -14.5% 115.6 -42.2% 137.6 +3.8% 154.0 +11.4%
Optimized LED 55.2 -17.6% 55.8 -7.4% 66.1 +7.2% 71.9 +6.6%
Total 343.1 +0.6% 343.0 -6.2% 478.7 +47.6% 566.7 +67.7%

Drew

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@drew1618t that chart is excellent – thanks for putting it together.

Since I’m posting I’ll also use this opportunity to thank you for your offer to post the rules of the board on Mondays. Yes, please do!

…

One of the things we can no longer do on the Motley Fool boards is send a direct response by email, nor is there any other way to send a private message. That’s why I’m posting this on the board. It’s not ideal to clutter up the board this way…but I don’t know what else to do. With WPR and Ryshab and others who are on Twitter, I can message them there, and yes, Reddit allows that too.

@drew1618t are you on Twitter or Reddit?

Bear

on twitter

and on reddit

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