Quick update on TSS Inc

The story is getting better and better

• For an introduction, see our previous article.

• The stock has done exceptionally well, yet we argue there is more to come with powerful tailwinds strengthening.

More to come

• Capacity expansion

• Q3 figures

• AI market hyperscalers

• Dell’s AI-server business will grow 94%-300% next year

• Uplisting and Russell 2000

• Additional growth drivers (hyperscaler replacement demand, enterprise market, Modular Data Centers, Facilities Management, new customers).

Capacity Expansion

• The company announced the move to a new facility early next year with a 60% increased capacity (while its present facility wasn't at full capacity yet).

• Power infrastructure to support racks using 3x-5x current power levels, enabling future tech roadmap (testing and validating direct liquid-cooled racks).

• No financing necessary for the $25M-$30M in CapEx (mostly for the increasing power handling).

• The new facility is expected to begin operations in early 2025 to support a new multiyear customer agreement. On the latter (from the linked PR):

"Based on our analysis of industry trends and the deepening of our relationship with one of our largest customers, we anticipate demand for our AI-enabled rack integration services will outpace our current capacity. Our outlook for at least the next five years is for volumes to be at a similar or greater level to what we began to experience under our first, large AI-related program," said Darryll Dewan, Chief Executive Officer of TSS Inc.. "One of our largest customers has demonstrated a true sense of partnership in structuring an agreement supporting this capacity expansion.

• That customer, of course, is Dell.., that first, large AI-related program mentioned is xAI (Elon Musk’s AI company), which itself is still in the early innings of an epic build-out.

• Q2 contained just one month of the xAI build-out, Q3 will contain three months of that expansion.

Dell ramping

• TSS is Dell’s trusted Dell partner for two years running.

• Here is IBD (our emphasis):

Investment bank Morgan Stanley on Monday raised its price target on Dell Technologies (DELL) stock as it forecast potential market share gains from beleaguered rival Super Micro Computer (SMCI)...

"Dell's AI server momentum remains strong, with our recent checks pointing to about $20 billion of AI server revenues in fiscal 2026, 56% higher than prior Morgan Stanley estimates," he said in a client note. That sales target equates to 94% year-over-year growth, thanks to sales of systems with Nvidia (NVDA) AI chips, he said.

Woodring said his $20 billion estimate represents his base case scenario and assumes no market share gains from Super Micro.

However, the probability is rising for his bull case scenario for Dell to get $40 billion in AI server sales in fiscal 2026. Dell's fiscal 2025 ends in late January. Under the bull case scenario, Dell would take one-third of Super Micro systems business via competitive wins, Woodring said.

• Let that sink in, Dell’s AI server business is going to grow between 94% and 300% next year (FY26 starts in Feb 2025).

Further, on Nov. 5, Super Micro cut its sales targets for the September and December quarters.

• So Dell is likely to already gaining significant market share from SMCI! No wonder they engaged with TSS for a multi-year customer agreement

Q3 Figures

• Thursday 14 November after market close.

• They are likely to be a blowout as Q2 contained just one month of the xAI build-out, Q3 will contain three months of that expansion.

• Management also guided for a 10-fold of its procurement business to $50M, but keep in mind this is low-margin revenue and quite lumpy.

• The market might not have fully recognized this blowout so the reaction could be very positive, on the other hand, there might also be profit-taking. We don’t know what they will be and we’re in for the longer-term trends, not to play earnings.

• The shares can uplist at any moment and at $9, they easily qualify for the Russell 2000 which will trigger additional buying as soon as December (they do have to uplist to a senior exchange for that).

Additional growth opportunities

• Replacement demand, servers have a life span of about 3 years, the massive hyperscaler (cloud computing providers like MSFT, AMZN, ORCL, META, and GOOG) build-out (itself in the early innings) will produce a stream of replacement demand.

• The enterprise market will gather steam next year as businesses will embark on their own AI initiatives. In time, this market will dwarf the hyperscaler demand (see slide above).

• MDC (Modular Data Centers). TSS has already gained a foothold in MDC , which is likely to take off with the enterprise market in the coming years.

• Facilities Management. TSS has a foothold here as well, but this business is likely to expand with the enterprise/MDC business. This generates higher quality revenue as margins are much better (in the order of 70%) and revenues are recurring, which enables higher valuation multiples as well.

• Additional customers. While TSS provides essential services to Dell and is in very good standing, and will benefit from Dell’s huge expansion in the space, the company is also likely to win additional customers. Looks like MSFT is already onboard:

Conclusion

• We think the best is yet to come, whatever the Q3 figures will be there are powerful tailwinds that are only gathering pace.