As Super Micro Computer may face delisting, another small-cap stock related to the AI data center business, TSS, recently successfully landed on the Nasdaq, providing investors with a focus.
TSS Inc (TSSI.O) is a systems integrator that specializes in purchasing and configuring equipment for data centers and has close ties with Dell (DELL.N). TSS is located in Round Rock, Texas, less than 5 miles from Dell's headquarters. Customers usually buy servers from Dell first and then go to TSS for data center configuration support.
Dell's importance to TSS is self-evident: in 2023, 96% of TSS's revenue came from Dell. This close cooperation allows TSS to directly benefit from the rapid growth of Dell's data center business. Last quarter, Dell's server business revenue grew 38%, while its PC business shrank 4% during the same period.
After TSS announced its transfer from the over-the-counter market to the Nasdaq, its stock price soared 22% on November 15. The news led to market speculation that it might be included in the Russell 2000 index in the future. At the same time, with the help of Dell data center sales, TSS's third-quarter revenue surged 698% year-on-year to US$70.1 million, and earnings per share increased from 1 cent last year to 10 cents.
However, despite a 179 percent increase in revenue and gross profit, gross margin shrank to 11 percent, similar to Super Micro Computer's (SMCI.O) recent quarter. This decline in profitability may have caused concern among some investors, causing its stock price to fall 33 percent in after-hours trading on November 16.
TSS's biggest risk is its high dependence on Dell. If it loses this business, its revenue will drop significantly, and the company may even face an existential crisis. In addition, TSS needs to maintain cash flow by selling accounts receivable. In 2023, TSS sold $137 million in accounts receivable and paid $2 million in interest. Although this operation eased cash flow pressure, it also showed the depth of its dependence on Dell.
On the other hand, TSS also has development potential. It is expanding its business and moving to a new location to meet its growing power needs. This year, Dell also provided $1.7 million in support for TSS's capital expansion. As Super Micro's accounting issues come under more scrutiny, customers like Nvidia (NVDA.O) may be more inclined to choose Dell as a reliable partner for its AI business, which will also bring more opportunities to TSS.
In addition, if TSS can attract a second major customer, its growth will accelerate further. But according to TSS CEO Darryll Dewan, this strategy also needs to be carried out within the scope of Dell's permission.
With its close cooperation with Dell and the rapid growth of its data center business, TSS has demonstrated its ability to become a potential stock in the field of AI. However, its high dependence on a single customer and the volatility of its profitability also bring uncertainty to its future development. For investors who are optimistic about the field of AI, TSS's prospects are worth paying attention to, but the risks should not be ignored.
Article forwarded from: Jinshi Data