Top 100 Stocks to Buy: TSS Inc. Loses Some of Its Shine in the DeepSeek Dive

TSS Inc. (TSSI) is Barchart’s top-ranked stock in its Top 100 Stocks to Buy. This is the case despite a nearly 23% drop on Monday due to the DeepSeek dive. It remains in the first spot, up 4,026% over the past 52 weeks.

Yesterday, tech stocks took it on the chin--the Nasdaq 100 was off 2.97%--as investors questioned whether the exorbitant fees charged by OpenAI and the like aren’t what they’re cracked up to be. It turns out that DeepSeek can provide equal or better quality for much less. 

More importantly, it brought into question nosebleed valuations for AI stocks--TSSI among them. After all, you haven’t gained 4,026% over the past year without a slight multiple expansion. 

I think Nvidia (NVDA) will be OK. It was due for a correction. However, a closer look at TSS suggests it could be time to sell. A bunch did yesterday. With futures down in the pre-market, TSSI bulls could see more losses on Tuesday. 

I’m no techie, so I’ll come at my TSS analysis purely by the numbers. I’ll leave the tech analysis to others.

The one thing I do know: As recently as May 2024, TSSI stock was trading under $1. There could be a reason for that. I’ll ponder this question. 

Why Is TSSI Stock Up 4,026?

That’s the million-dollar question. I’ve seen TSS in the Top 100 Stocks to Buy for weeks, but I have never looked more closely at its story. Blame that on my aversion to tech stocks. 

From August 2024 to November 2024, its stock’s appreciation was virtually straight up, moving from $2.56 in mid-August to $11.98 in mid-November, a 368% gain (1,472% annualized). That’s some move. 

I’ve highlighted the price action of TSS stock, but that doesn’t explain why. The ShareholdersUnite Substack published an article on Sept. 26, 2024, listing the 10 reasons to buy it. 

By their rationale, TSS is primed to ride the exceptional growth expected from AI-related hardware and software, which Bain & Company estimates will grow to as much as $990 billion by 2027. That’s a significant number, to be sure. 

Of the 10 reasons, the firm’s Q3 ramp-up is the most tangible and real. 

In Q3 2024, its revenue was up 689%, to $70.1 million, with its procurement revenue accounting for 86% of its total.

“We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function,” states its Q3 2024 10-Q. 

My non-tech brain would consider it to be akin to a vertically integrated homebuilder that provides everything from land acquisition, permitting, house design, construction, appliance procurement, etc. 

The Procurement revenues are the fees paid to obtain all the hardware, software, and professional services needed to get a facility operational. Its Systems Integration revenue (11% of its total) is what it’s paid to take the stuff it acquired and make it work. Facilities Management (3%) are management fees paid to it for the post-completion management of a facility, including maintenance and non-IT staffing such as electricians, HVAC mechanics, etc. 

The key to the bullish argument is for it to continue to grow its revenue generated from AI-enabled racks integrated into its customers' enterprise data centers. 

More customers translate into more of all three revenue streams. Sounds straightforward enough. 

There’s a Big But

In the company’s Q3 2024 press release, CEO Darryll Dewan said the following about TSS’s business in the quarter:

“The recent signing of a multi-year agreement with one of our largest customers to integrate AI-enabled racks fundamentally changes the earnings potential of the company. Importantly, this agreement increases our visibility into future opportunities and delivery requirements in this rapidly evolving space and provides a strong foundation from which we can continue to grow profitably.”

Again, it sounds simple enough. 

However, when Dewan mentions “customers,” he’s really only talking about Dell (DELL), the US-based IT OEM that accounted for 100% of its third-quarter revenue, 300 basis points higher than in Q3 2023.

In fairness to TSS, it did have $3.83 million in RPOs (remaining performance obligations) at the end of September, so some of that could be another company and should be revenue reflected in future quarters. 

The trick for TSS is bagging a second elephant (I’m riffing off the movie Wall Street when Bud Fox (played by Charlie Sheen) finally gets a meeting with Gordon Gekko (Michael Douglas) after months of cold calls, etc., he screams out “I just bagged the elephant!”

No company can survive long-term with just one customer. Ideally, it would get Dell down to below 10%, which would require bagging several elephants. 

Who knows if it’s doable? 

At the end of September, it had an accumulated deficit of $62.2 million. It will take at least two years of similar revenue growth and profitability before it turns positive. That’s no certainty. 

The Valuation    

ShareholdersUnite said about TSS in September: “Valuation is still very modest.” TSS stock is up 81% in the four months since, despite yesterday's 22% decline. 

S&P Global Market Intelligence says its enterprise value is $267.8 million, 2.2x the trailing 12-month (TTM) revenue and 32.8x its TTM EBITDA. Before yesterday, I’d say these were reasonable multiples given the company’s top and bottom-line growth. 

How can investors be sure that TSSI stock’s 4,026% gain is just the beginning and not the end? You can’t. 

Shareholders who’ve generated these gains in the past year should be taking profits. If you bought 1,000 shares for around $2.56 last August, at least sell 200 to get your initial investment back. 

With only one customer, you’re not standing on solid ground. Paraphrasing Warren Buffett, “Always protect your capital.”

TSS’s gross margin in the first nine months of 2024 was 15.4%. This alone tells me it’s not the AI choice to make.