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Time To Bet On Cray Inc. (CRAY)

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Supercomputers are no more just things from sci-fi films. They are increasingly becoming a part of our everyday life. Each day, huge amounts of data are produced. This data needs to be processed and stored. One of the companies that specializes in supercomputers is Cray Inc. (NASDAQ:CRAY). Cray makes and operates supercomputers, and provides storage and Big Data solutions. The company’s first quarter report was not received well by investors. Since then, stock price has stabilized, and it’s tempting to investigate whether Cray is a “buy” or not.

Want went wrong?

Cray Inc.Cray Inc. (NASDAQ:CRAY)’s stock has fallen 18% on the day of the report. Cray reported an adjusted net loss of $8.4 million, or $0.23 per share, compared to net income of $5 million, or $0.13 per share, in the first quarter of 2012. Analysts were expecting Cray to report a $0.24 per share loss. The company has beaten estimates, but its stock was punished. It’s important to mention that Cray Inc. (NASDAQ:CRAY) was up 33% in 2013 before the earnings report. This was a fast rise, and investors were anticipating that the company would blow estimates. This did not happen, so they sold the stock.

The earnings report itself was not scary at all. Cray Inc. (NASDAQ:CRAY) has reported that product margin was 24% and service margin was 50%. Product margin was negatively impacted by the weakening of the Japanese Yen. Cray stated that it performed well on the tempting Japanese market, but the Yen has dropped 18%. Products accounted for a 75% of total revenue, while services had a 25% share of total revenue. Cray Inc. (NASDAQ:CRAY) has reaffirmed its revenue guidance for the year 2013. The company expects revenue to be $500 million. Forty-five percent of the annual revenue is expected to come in the fourth quarter.

The nature of the business

Cray’s revenue depends on a small number of large transactions. Cray develops big systems that cost a lot, and take time to implement. This is why it is normal that the company’s quarterly revenue jumps like a rabbit. This fact is important to remember when thinking about investing metrics like P/E. Current P/E could not be relevant because it may include some big transaction that happened a couple of quarters ago. Cray’s current P/E is less than five, thanks to one-time $140 million payment from Intel in the second quarter of 2012.

In March, Cray was awarded a $32 million contract with the Swiss National Supercomputing Centre to upgrade and expand its Cray XC30 supercomputer. The company’s revenue is dependent on such contracts. Cray XC30 is the company’s flagship product. It is well received by the market, and Cray puts a lot of hopes on this platform.

Competition

Silicon Graphics International Corp (NASDAQ:SGI) is the other company that is focused on supercomputers. The company’s first quarter results have beaten estimates by 29%. Its stock is up more than 40% year-to-date. Silicon Graphics International Corp (NASDAQ:SGI) is active on the storage and big data field too. It is trading with a forward P/E of 14, while Cray has a forward P/E of 30. However, the nature of the business makes it hard to predict the number of contracts that a particular company would earn, so revenue and earnings estimates are often adjusted. Silicon Graphics is expecting to deliver earnings of $0.30 per share on revenue of approximately $775 million in 2013. Last year, the company delivered earnings of $0.12 per share on revenue of $753 million. This increase in profitability would certainly be good for the stock. Analysts are expecting even more from Silicon Graphics. Their mean earnings estimate for 2013 is $0.32 per share. While the stock has already performed well this year, it has more room to grow. The next quarterly report could be the tipping point for the stock.

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