Editor's Choice

A Supercomputer Company? That's Cray

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

You might think that supercomputers are the stuff of crazy government research labs and that no straight-thinking company would ever target such a complex and surely sparse market. But you would be wrong, of course. With major advances in high performance computing (HPC) in recent years that “sparse” market has grown quite a bit. Worldwide revenue for large-scale HPC systems -- defined as those that sell for more than $0.5 million -- were up 24% in 2011 to $4.4 billion. Furthermore, large-scale HPC systems revenue is expected to reach nearly $7.5 billion by 2015. That’s a growth rate of 20%!

<img src="/media/images/user_6293/crayjaguar_large.jpg" />

The Jaguar supercomputer at Oakridge National Laboratory is powered by Cray architecture and AMD processors. It will be renamed Titan after it completes a massive upgrade to the newest massively parallel computing technology.

Anyone can invest in HPC suppliers Dell, Hewlett-Packard, or IBM, but those investments could be bogged down by slowing laptop revenue, layoffs, and other problems that occur with a giant tech company. I am not saying that these are poor investments or bad companies. I am simply saying there are better pure plays in supercomputing, such as Cray, Inc. (NASDAQ: CRAY). The company’s slogan should convey the message: “Cray. The supercomputer company.”

No one knows what it means, but it's provocative!

Well actually the company gets its name from Seymour Cray, also known as the father of supercomputing. In fact, 2012 is Cray’s 40th year as a supercomputer company. Talk about being the first one at the party! The good news for investors is that Cray is uniquely positioned to capture the robust growth in HPCs.

Take the company’s Jaguar supercomputer at Oakridge National Laboratory, for example. The system was named the fastest computer in the world in November 2009, but officially lost its rank when a Chinese computer reported 2.5 quadrillion calculations per second in November 2010 (it is currently ranked third in the world). The Jaguar may reclaim the lead atop the world’s Top500 list in November 2013 after it upgrades to the newest Cray system and replaces a good chunk of CPUs with NVIDIA (NASDAQ: NVDA) Keplar GPUs. It will have a peak performance that is twice as fast as the current fastest supercomputer.

Can they actually make money?

Revenue streams have been dependent on a handful of contracts throughout much of Cray’s history. But the company has hit a patch of great developments recently that will help foster future growth at an opportune time in HPC growth.

Several months ago Cray replaced IBM (yes, that IBM) as the lead for the National Center for Computing Advancements’ (NCSA) Blue Waters supercomputer, which will be completed in October 2012. In April the company sold its interconnected hardware development program to Intel (NASDAQ: INTC) for $140 million and promptly soared to $11.50 per share. And just last week Cray completed a milestone under a DARPA Phase III High Productivity Computing Systems program, which allows the company to collect a cool $12 million payment. Most of the milestone payment will count against R&D expenses for the quarter.

Before the Intel deal Cray was trading at about $6.80 per share. With the flurry of announcements the company should report a comfortable profit in 2Q12. And while they aren’t necessarily recurring events, the company will be able to use the large influx of cash to fuel growth for the foreseeable future. As a result of the Intel deal Cray lifted 2012 guidance to $430-$450 million, up from the previously targeted $340-$360 million and blowing away 2011 revenue.

Here is an estimate of 2Q12 results compared to actual 1Q12 results:

<table> <tbody> <tr> <td> <p><strong>Fiscal period</strong></p> </td> <td> <p><strong>Cash & equiv.</strong></p> </td> <td> <p><strong>Revenue</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> </tr> <tr> <td> <p>First quarter 2012</p> </td> <td> <p>$108.8 million</p> </td> <td> <p>$112.3 million</p> </td> <td> <p>12.36</p> </td> </tr> <tr> <td> <p>Second quarter 2012</p> </td> <td> <p>$220 million</p> </td> <td> <p>$200 million</p> </td> <td> <p>7.95</p> </td> </tr> </tbody> </table>

Too dependent on government contracts?

One legitimate area of concern is the dependence on government customers. The company has done an excellent job of diversifying its revenue stream in the last four years and happily announced that only 54% of 2011 sales came from government sources – compared to 81% in 2008. That number will continue to shrink as more and more companies develop an appetite for HPCs to gain a competitive advantage. Earl Joseph, the program vice president for Technical Computing at IDC, gave this rosy response when asked if HPCs were safe from budget cuts:

"Supercomputers have been closely linked not only to scientific advances but also to industrial innovation and economic competitiveness. For this reason, nations and regions across the world are increasing their investments in supercomputing even in today's challenging economic conditions."

Foolish bottom line

No other company has the name recognition, experience, or performance record to capture the amazing growth in HPCs quite like Cray. A quick look at the Top500 list shows that Cray has systems in 16 of the top 50 supercomputers and 36 in the top 500. The company will only continue to grow as the supercomputer industry matures and more companies become dependent on the advantages they create. Cray is also uniquely positioned to piggy-back on the growth of GPU computing advancements made by chip companies NVIDIA and AMD. When it comes down to it, Cray is simply in a league of its own. That holds true even when including tech giants like Dell, HP, and IBM.

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