Stock analysts don’t like stocks like CRAY for its volatile financial, as results fluctuate significantly from Q-to-Q. Cray has few sets of customers who don’t buy equipment every Q. Government research funding has huge impact on CRAY revenues, and given economic situation, research funds won’t be abundantly available. This negativity was heavily reflected in reduced scope with DARPA agreements in first 9 months of 2010. For Cash flow – I believe company is struggling heavily to balance operating cash flows. Again due to large inventory cost for XT6/XE6 systems, and slow lead cycles for customer purchases, managing cash flow is challenge for the company. Gross margins and revenues face erratic predictability. Any attempts from management to stabilize its forecast will be liked by financial community.
Cray specializes its technologies in interconnects, packaging and Software. Cray invests in R&D to design custom high end supercomputers and expects growth through gain in market share & organic growth of high end supercomputer market segment.
New Cray XTm systems – Cray XT6 (Q2’ 10) & Cray XE6 (Q3’ 10). Q4’ 10 bookings are extremely important metric to watch for. Company partners with AMD & Nvidia for computing solutions but has plans to integrate Intel solutions in XE6 product family. Given Nvidia & AMD GPUs have beaten Intel in multi-core performance by huge leap. Cray offers unique capabilities in high-speed, high bandwidth system interconnect design, compiler technology, system software and packaging capabilities. In addition to competition in high end HPC segment, Lower end supercomputers based on Intel, AMD computation with commodity networking solutions are putting pricing pressure for high end vendors such as CRAY. Though these systems could offer better “peak performance/ $$”, often customers face longer lead times for “time to solution”. Often commodity processor solutions create system bottlenecks for network data transfer rates & create unbalanced systems resulting in lower productivity for complex applications. High end HPC vendors often use custom FPGA accelerators or GPU accelerators to augment compute requirements with custom programming models, thus offering better performance, power & data throughput from these systems.
XT/XE product introductions are savior for the company and company will be able to secure additional wins with expanding solutions to more customers. Company is offering services, and new high performance data storage solutions as well.
Though economic factors could impact purchase of high end systems in research community, pressure from China in HPC supremacy could provide some relief in funding. Overall, I believe company has decent product lineup for a good 2011 revenue increase. Company has plans to expand its product lineup & services business, which is overall good for growth of company.
Company has only $68M in cash, with current ratio of 1.36, its decent cash situation for sustaining. But company needs to continually invest in R&D, and given cash situation could hamper its chances for any inventory requirements or growth R&D spending. Company management needs to raise cash more.
Earnings forecast:
As shown in chart below, company had really bad years in 2007, 2008, 2009, but things are starting to look better for 2010, 2011. Company has a good chance to get back in black now.
In terms of stock performance, company survived its near death with Stock touching lows of $1.15 in Nov 2008. Since then stock recovered to 9.49, for a 725% run up in Aug 2009. For several months stock has been range bound between $4.50 & $7.50. February earnings are key to the stock performance. Stock has been making ascending low’s indicating market thinks bottom line for company is improving. I’ll watch for stock to break its previous high of $7.70 to bet back to $9.25 range in 2011. CRAY is Sun alike high flier stocks of 2000, with all time high of $65, which is not coming anytime soon in my opinion. Company has changed completely from old business model.
Overall I personally will use CRAY as short term trading stock than long term buy and hold.
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