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Waiting for Brighter Skies at SGI

Server and visual workstations maker SGI continues to put out press releases regarding its new product line, but investors appear unimpressed. Meanwhile, the firm's low share price has been attracting value investors. For this longshot to pay off, though, the company first needs to show proof of improvements, especially in the mindshare and execution departments.

By Brian Graney (TMF Panic)
August 23, 2000

Servers and visual workstations maker SGI (NYSE: SGI) cranked up the PR machine this morning and issued a few press releases regarding support from NASA's Ames Research Center and the Army's Engineer Research and Development Center and Army Research Lab for systems based on the company's new Origin 3000 series servers and its NUMAflex modular architecture for system scalability.

Significant? Not really, since today's releases basically just provided additional details to statements of support made in the original press release that officially announced the Origin 3000 series last month.

Still waiting for "the big one"
More than anything else, today's releases were likely aimed at keeping SGI's name in the business news flow somehow. They also may be a form of low-key damage control after word broke late yesterday that a $200 million supercomputing contract from the Department of Energy was awarded to rival Compaq (NYSE: CPQ). SGI was reportedly bidding for that contract along with Sun Microsystems (Nasdaq: SUNW), according to a Bloomberg News report. Missing out on the DoE contract isn't the end of the world for SGI, to be sure. But a win might have generated some positive press for the company, which has been hard to come by lately for the struggling SGI.

Warmed-over press releases are nice and all, but investors and analysts alike are still waiting for the company to execute on its new server-oriented strategy. The new Origin 3000 products, which are based on SGI's third generation ccNUMA (nonuniform memory architecture) technology, have been partially blamed for year-over-year revenue declines of existing producs in the past two quarters as customers have looked forward to the new products. On the bright side, the scuttlebutt on the new product line appears favorable with SGI stating last month that it had already generated an order backlog over $100 million.

On the bright side, the scuttlebutt on the new product line appears favorable. SGI said last month it had already generated an order backlog over $100 million.

A potential value play?
In the interim, SGI's stock has continued to languish on the frontier of Penny Stock Land -- though it has bounced up from its absolute lows over the past couple of months. But despite its low share price, SGI is not exactly a small company and still sports an enterprise value hovering near $1 billion. Then again, in this day and age where hardware and software leaders routinely sport market caps in the tens if not hundred of billions of dollars, a $1 billion valuation ain't what it used to be. The big bets in the UNIX market being targeted by SGI's new servers are already on companies such as Sun, IBM (NYSE: IBM), and Hewlett-Packard (NYSE: HWP), leaving SGI to pick up the longshot odds.

Despite the high odds, SGI has been attracting some marginal attention from value investors at its recent prices, many of whom have likely been drawn to the company like moths to a nighttime porch light based on its low price-to-book and price-to-sales ratios compared to its peers. However, it's still more or less unknown whether this stock market dog will hunt, which means those traditional "deep value" yardsticks are pretty useless right now.

One way or another, SGI needs to build competitive advantages for itself in servers in order to compete and make a run at substantial future shareholder value creation. As observers have noted in the past, the main challenges lie not in the firm's technology, but in catching up to the server leaders in terms of customer mindshare, sales force strength, and overall execution. Of course, SGI's management already knows this, and so does the market. For investors looking at today's low share price and thinking that SGI may represent a value opportunity, it may be best to wait and see if the coming weeks and months yield improvements in these areas or just more unexciting press releases.

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