PENG

We rate Penguin Solutions, Inc. (PENG) as a Reduce with a composite score of 48.3/100 at a current price of $20.24. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in value (77th percentile) and quality (59th percentile), which together account for the majority of the composite score. Offsetting weakness in investment (31th percentile) and momentum (35th percentile) tempers our overall conviction. We assign a No Moat rating (27/100), High uncertainty, and Poor capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

Penguin Solutions, Inc. holds a top-quartile position (#0 of 50) within the Manufacturing sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 48.3/100 places it at rank #2287 in our full 7,333-stock universe. At $1.1B in market capitalization, Penguin Solutions, Inc. is a small-cap player in the Manufacturing space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue is growing at 1%, though momentum at the 35th percentile suggests the market has not yet fully recognized this trajectory. This potential disconnect between fundamental improvement and market recognition could represent an opportunity for patient investors if the growth trend persists.

The margin cascade tells an important story: gross margins of 29% (-13.8pp vs sector) narrow to operating margins of 5% (+3.4pp vs sector) and net margins of 1.8%, yielding a gross-to-net conversion rate of 6%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $20.24, Penguin Solutions, Inc. appears undervalued relative to its fundamentals. Our value factor score of 77/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. The stock screens as attractively priced on a majority of these measures, suggesting the market may be underappreciating the underlying fundamentals.

The stock currently trades at a P/E of 41.3x (a 86% premium to the sector median of 22.3x), EV/EBITDA of 18.2x (at a premium), P/B of 2.5x, P/S of 0.7x. The above-sector P/E multiple suggests the market is pricing in superior growth or quality, which our analysis finds only partially justified by current fundamentals.

We assign a High uncertainty rating to Penguin Solutions, Inc.. Key risk factors include elevated market sensitivity (beta of 1.82), significant leverage (115% debt-to-equity), elevated valuation multiple (P/E 41.3x) that leaves limited margin for error. The wide range of potential outcomes widens our fair value estimate and increases the possibility of permanent capital impairment. Investors considering this name should size positions accordingly and demand a meaningful margin of safety before initiating.

Specific risk factors that inform our assessment include: elevated market sensitivity (beta of 1.82); significant leverage (115% debt-to-equity); elevated valuation multiple (P/E 41.3x) that leaves limited margin for error; the combination of leverage (115% D/E) and thin margins (1.8% net) amplifies downside risk. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 53th percentile and quality factor at the 59th percentile provide a quantitative summary of the overall risk landscape.

We identify limited risk mitigants at this time, which contributes to our high uncertainty assessment. Investors should monitor for improvement in balance sheet metrics, margin stability, and business predictability that could warrant a downgrade in our risk assessment over time.

We rate Penguin Solutions, Inc.'s capital allocation as Poor. Key concerns include weak asset returns (ROA 1.5%). Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — Penguin Solutions, Inc. significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, Penguin Solutions, Inc. receives a Reduce rating with a composite score of 48.3/100 (rank #2287 of 7,333). Our quantitative framework assigns a No Moat (27/100, trend: stable), High uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 51/100.

Our analysis does not support a constructive view on Penguin Solutions, Inc. at this time. The combination of limited competitive advantages, high uncertainty, and poor capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.