TSS Inc. (TSSI) has emerged as a compelling AI data center player following its recent Nasdaq uplisting.
Formerly traded over-the-counter, the small-cap company experienced a meteoric rise, with its stock soaring from $0.27 at the start of 2024 to $11.98 as of last Thursday. The move has drawn comparisons to Super Micro Computer (SMCI), a recent favorite among AI investors now facing potential delisting.
TSS specializes in systems integration, configuring and supplying equipment for data centers. Its close ties to Dell Technologies (DELL)—which accounted for 96% of TSS's revenue in 2023—position it squarely within Dell’s rapidly growing server segment. Dell's server revenue rose 38% last quarter, in stark contrast to its shrinking PC business. This symbiotic relationship has fueled TSS’s dramatic growth, as reflected in its third-quarter revenue of $70.1 million, up 689% year-over-year.
Impressive Growth, But At What Cost?
Despite its revenue surge, TSS faces challenges. Gross margins have dropped sharply, from 31.9% in Q3 2023 to 11.3% in Q3 2024, as the company relies heavily on lower-margin procurement services. Moreover, its extreme dependence on Dell creates significant concentration risk. If Dell were to pull its business, TSS’s survival could be jeopardized.
To mitigate these risks, TSS has secured a multiyear agreement with Dell, providing some stability and enabling expansion plans. CEO Darryll Dewan notes that the company is preparing for growth spikes, including a new facility designed to handle two to three times its current volume.
Financially, TSS has been creative in managing cash flow, selling $137 million in receivables in 2023 to smooth operations. This practice, while common, underscores the leverage Dell holds over TSS, from extended payment terms to capital expansion contributions.
Despite its revenue surge, TSS faces challenges. Gross margins have dropped sharply, from 31.9% in Q3 2023 to 11.3% in Q3 2024, as the company relies heavily on lower-margin procurement services. Moreover, its extreme dependence on Dell creates significant concentration risk. If Dell were to pull its business, TSS’s survival could be jeopardized.
To mitigate these risks, TSS has secured a multiyear agreement with Dell, providing some stability and enabling expansion plans. CEO Darryll Dewan notes that the company is preparing for growth spikes, including a new facility designed to handle two to three times its current volume.
Financially, TSS has been creative in managing cash flow, selling $137 million in receivables in 2023 to smooth operations. This practice, while common, underscores the leverage Dell holds over TSS, from extended payment terms to capital expansion contributions.
The Road Ahead
TSS’s reliance on Dell, while a double-edged sword, aligns it with the burgeoning AI market. Nvidia’s potential preference for Dell as a partner—amid concerns over Super Micro—could funnel even more AI-related business toward TSS.
Opportunities for diversification could further bolster TSS’s growth. Landing a second major client would reduce dependence on Dell, but this expansion would require careful navigation of existing partnerships.
In terms of valuation, TSS trades at 2.6 times sales for its last four quarters, a premium compared to Dell’s 1.0 times sales. This reflects investor optimism about TSS’s ability to capitalize on its AI-focused trajectory.
While TSS is not without risks—volatile cash flow, declining margins, and concentration in a single customer—it presents a high-reward opportunity for investors willing to bet on its growth story. With its Nasdaq uplisting and booming AI potential, TSS is a small-cap stock worth watching.
TSS’s reliance on Dell, while a double-edged sword, aligns it with the burgeoning AI market. Nvidia’s potential preference for Dell as a partner—amid concerns over Super Micro—could funnel even more AI-related business toward TSS.
Opportunities for diversification could further bolster TSS’s growth. Landing a second major client would reduce dependence on Dell, but this expansion would require careful navigation of existing partnerships.
In terms of valuation, TSS trades at 2.6 times sales for its last four quarters, a premium compared to Dell’s 1.0 times sales. This reflects investor optimism about TSS’s ability to capitalize on its AI-focused trajectory.
While TSS is not without risks—volatile cash flow, declining margins, and concentration in a single customer—it presents a high-reward opportunity for investors willing to bet on its growth story. With its Nasdaq uplisting and booming AI potential, TSS is a small-cap stock worth watching.
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