Penguin Solutions' Q3 Results: Flying High on AI Wings Despite Margin Headwinds?

Investors, let's cut through the noise on Penguin Solutions (NYSE: PGS). The company just reported Q3 earnings that are a classic case of “good news, bad news, and maybe a great investment opportunity.” Here's why this stock could be a contrarian buy for those willing to bet on AI's long game.

First, the top-line: revenue rose 7.9% to $324 million, but that's a letdown compared to the 10%+ growth rates some were expecting. Meanwhile, GAAP EPS sank to -$0.01, a catastrophic-looking number. But here's the catch: non-GAAP EPS jumped to $0.47, a 27% increase from last year. This is classic Cramer territory—dig deeper into the numbers! The gap between GAAP and non-GAAP results is massive, thanks to $95 million in adjustments, including a $16 million goodwill impairment charge. Strip out those one-time hits, and the core business is humming.

Now, let's tackle the elephant in the room: margins. GAAP gross margins fell to 29.3%, while non-GAAP dipped to 31.7%. Yuck. But here's the flip side: Integrated Memory sales surged 42%, and that's the segment powering Penguin's AI play. Memory chips are the lifeblood of AI training, and this division's growth is no fluke. Meanwhile, the Advanced Computing division grew steadily, and LED sales held up despite a minor dip.

The refinancing deal after Q3 is a game-changer. Cash reserves jumped to $710 million, while debt dropped below $640 million. That's a net cash position of $70 million, up from negative $274 million a year ago. This isn't just financial engineering—it's a war chest for R&D and acquisitions in AI software/services. CEO statements emphasized “expanding go-to-market resources” in AI, which suggests Penguin is doubling down on what could be its crown jewel.

So here's the crux: is the margin pressure temporary, or a sign of deeper issues? The company's outlook projects flat gross margins for the rest of the year, but revenue growth is still forecast at 17%. If Penguin can stabilize margins while scaling AI software/services—a $50 billion market by 2028—this could be a steal. The refinanced balance sheet gives them room to invest without sweating debt, and the U.S. redomiciliation (a Delaware move) could unlock tax efficiencies and investor confidence.

Bear case? Margins keep falling, AI adoption slows, and the stock's P/E (around 25x forward non-GAAP EPS) looks pricey. But bulls will argue that AI is a multi-year megatrend, and Penguin's early mover advantage in memory and software could pay off big. The stock is down 15% YTD, but if you buy here, you're betting on execution in 2026.

Action Alert: For long-term investors, PGS could be a buy around current levels. The balance sheet is stronger, AI tailwinds are real, and the non-GAAP results suggest a resilient core business. Just keep an eye on Q4 gross margin trends—if they stabilize, this stock could soar. Short-term traders? Maybe sit this one out—near-term volatility is inevitable.

In Jim's words: “When the world's scared, that's when you look for diamonds in the rough. Penguin's Q3 was messy, but the AI spark is still there. If you can stomach the noise, this might just be a steal.”

Final call: Hold for now, but mark this stock for a deeper dive if margins stabilize in Q4. The AI bet here is too big to ignore.