TSS, Inc. (TSSI): Is the Near-Term Revenue Dip a Buy Opportunity Amid Long-Term AI Tailwinds?

The recent 40% year-over-year revenue decline reported by TSS, Inc. (TSSI) in Q3 2025 has sparked debate among investors about whether the dip reflects a temporary operational setback or a more systemic challenge. With the company's Systems Integration (SI) segment-focused on AI and high-performance computing (HPC) infrastructure-posting 20% year-over-year revenue growth to $9.2 million, the question becomes: Is this near-term dislocation a buying opportunity for long-term investors positioned to capitalize on the AI infrastructure boom?

Near-Term Challenges: Operational Hiccups vs. Strategic Resilience

TSSI's Q3 results were marred by a 49% drop in procurement revenue to $31.1 million, driven by "procurement variability" and operational constraints at its new Georgetown, Texas facility. The SI segment, while growing, faced margin compression, with gross margins falling to 13% due to depreciation and under-absorbed fixed costs. These challenges contributed to a net loss of $1.5 million for the quarter, contrasting with a $2.6 million profit in Q3 2024.

However, the company's year-to-date performance tells a different story. Through September 2025, TSSI generated $184.8 million in revenue-a 88% increase compared to the same period in 2024. Management attributes this to strong demand for AI-enabled infrastructure and anticipates a "strong rebound" in Q4, with higher rack volumes and improved EBITDA performance. The updated full-year 2025 adjusted EBITDA guidance of 50–75% growth compared to 2024 underscores confidence in overcoming short-term hurdles.

Long-Term Catalysts: AI Infrastructure as a Growth Engine

The AI infrastructure market is a critical tailwind for TSSI. According to MarketsandMarkets, the global AI infrastructure market is projected to grow from $182.07 billion in 2025 to $394.46 billion by 2030, at a 19.4% compound annual growth rate (CAGR). TSSI's SI business is directly aligned with this trend, as it integrates AI and HPC systems for clients. CEO Darryll Dewan emphasized that the company is "well-positioned to scale operations and capture market share" in this rapidly expanding sector.

Strategic investments, mergers and acquisitions (M&A), and partnerships are further amplifying TSSI's growth potential. The company plans to expand its AI infrastructure footprint through targeted M&A opportunities, which could accelerate revenue diversification and margin improvement. Additionally, TSSI's Georgetown facility, despite current challenges, is expected to become a key hub for scaling AI infrastructure deployment.

Valuation Dislocation: Overpriced or Undervalued?

TSSI's valuation appears to reflect both optimism and skepticism. The stock trades at a price-to-earnings (P/E) ratio of 48.7x, significantly above the US IT industry average of 31.3x and the peer average of 35.1x according to Yahoo Finance. This premium suggests investor confidence in long-term AI-driven growth. However, a discounted cash flow (DCF) model suggests shares may be undervalued at $30.88, implying potential upside if the company meets its revised EBITDA guidance.

The price-to-book (P/B) ratio also presents a mixed picture. While one source cites a P/B of 38.13 according to GuruFocus, another lists it at 3.82 as of December 2025 according to StockAnalysis, with a book value per share of $2.30 according to StockAnalysis. This discrepancy highlights the need for caution, as valuation metrics can be volatile for high-growth companies with intangible assets.

Risks and Considerations

Investors must weigh TSSI's exposure to operational risks, particularly at its new Georgetown facility. Margin pressures in the SI segment and the company's reliance on procurement services-both sensitive to macroeconomic shifts-could delay recovery. Additionally, the AI infrastructure market faces challenges such as legacy system compatibility issues, which may slow adoption in traditional sectors.

Conclusion: A Calculated Bet on AI's Future

TSSI's near-term revenue dip is undeniably concerning, but it occurs against a backdrop of robust year-to-date growth and a favorable long-term industry outlook. The company's strategic focus on AI infrastructure, coupled with its updated EBITDA guidance and aggressive expansion plans, positions it to benefit from the AI infrastructure boom. While valuation metrics are mixed, the market's projected 19.4% CAGR suggests that TSSI's current dislocation could be a buying opportunity for investors with a multi-year horizon.

As with any high-growth stock, execution risk remains. If TSSI can stabilize its operations, improve margins, and capitalize on its AI infrastructure expertise, the stock may reward patient investors. However, those with a shorter time horizon or lower risk tolerance should monitor the company's Q4 performance and its ability to deliver on its 2026 organic EBITDA growth targets.