Zacks Investment Research has recently initiated the coverage of TSS, Inc. TSSI with an “Outperform” recommendation, highlighting the company’s strong growth trajectory, driven by its high-margin system integration and facility management businesses.

In the first half of 2024, TSS reported a 33% year-over-year revenue increase to $28.1 million, fueled by rising demand for artificial intelligence (AI) and high-performance computing infrastructure. The company's systems integration segment saw a 108% year-over-year surge in the second quarter, underpinned by AI-enabled rack integration and increased demand from original equipment manufacturers (OEMs).

TSS’s profitability has also improved, with gross profit rising 41% year over year as the company shifts toward more lucrative service lines. This operational efficiency contributed to a 74% year-over-year rise in operating income in the second quarter of 2024. The company’s debt-free balance sheet, with $8.3 million in cash, supports ongoing investments in capacity expansion to meet growing AI-driven demand, positioning TSS for sustained growth in the fast-evolving data center infrastructure market.

The research report highlights several key factors that could drive TSSI's growth. TSS is well-positioned to benefit from favorable industry trends as AI workloads drive the demand for complex data center infrastructure. The company’s expertise in integrating AI and high-performance computing solutions gives it a competitive edge, with expanding capacity allowing TSS to cater to a growing pipeline of projects. TSS is poised for sustained growth, with recurring revenues from long-term contracts and strong relationships with key OEM customers.

However, potential investors should consider certain risks outlined in the report. A significant concern is the company's reliance on a few large OEM customers, with 99% of its 2023 revenues concentrated among just three clients. This concentration exposes TSSI to substantial risk if any of these customers reduce spending or terminate contracts. Additionally, procurement revenues, which fell 54% year over year in the second quarter of 2024, are highly variable and add unpredictability to the company’s quarterly performance.

Another potential issue is the sharp inventory buildup, which increased from $2.3 million at the end of 2023 to $4.9 million by June 30, 2024. While this was driven by AI-related system integration efforts, there is a risk that mismatches between projected and actual demand could lead to excess inventory, straining the cash flow. Ongoing competition in the data center services market may pressure margins as larger players enter the AI infrastructure space.