Sify Technologies: Sell on an Unfortunate Momentum Rally (NASDAQ:SIFY)

Note:

I have covered Sify Technologies Limited, or “Sify” (NASDAQ:SIFY), previously, so investors should consider this as an update to my Previous article in the company.

Almost three months ago, I advised investors to participate in a very important project. discounted rights offer by leading Indian ICT solutions provider Sify Technologies as the company's rights were trading well below fair value at the time.

In total, Sify issued approximately 250 million new shares/ADSs for gross proceeds of only USD 30 million, thereby increasing the number of shares/ADSs outstanding by approximately 135%.

The rights offering caused the price of the company's US-listed ADSs to plummet by approximately 75%:

While participation in the rights offering and the subsequent sale of the ADSs on the open market provided readers with very solid returns, investors with more patience were handsomely rewarded, although solely as a result of Tuesday's unfortunate rally.

Even with the market experiencing some “AI fatigue” lately, the combination of the magic words “AI” and “NVIDIA” in a Press release It is still enough to attract the momentum crowd towards a penny stock like Sify:

Sify Technologies Limited (NASDAQ:SIFY), India’s leading digital ICT solutions provider with global service capabilities spanning data center, cloud, networking, security and digital services, today announced that it has become an NVIDIA Colocation Partner with the NVIDIA DGX-Ready Data Center program, certified for liquid cooling.

(…)

With the NVIDIA DGX platform and its supporting infrastructure technology ecosystem, Sify customers now have access to high-density supercomputing and powerful performance, delivered in scalable and flexible AI infrastructure solutions, and accessed across a broad co-location footprint.

The news sent the company's ADSs up nearly 200% in early trading on Tuesday before pulling back.

ADS ended the session up around 100% thanks to massive trading volume:

As a result, the company's market capitalization increased by almost $150 million to $286.5 million.

While there is nothing wrong with becoming “India's first DGX-Ready data center partner certified for liquid cooling,” Other Indian data center providers are likely to follow suit, mirroring developments elsewhere in the world:

Please note that NVIDIA Corporation (NVDA) does not seek exclusive relationships, but rather seeks to offer customers a large, global network of partners for its rapidly growing DGX artificial intelligence technology platform.

Also remember that NVIDIA's sales in India, while growing positively, remain a problem. very far from the company's domestic stronghold and major Asian countries such as China and Taiwan.

In the current fiscal year, revenue in India is expected to exceed $500 million, however, not all of these sales will be related to data centers and/or AI.

Similarly, private investment in AI in India remains a problem. lowercase fraction from leading countries such as the United States and China.

While there is certainly ample room for expansion, Sify now being a certified NVIDIA DGX partner is unlikely to have a measurable impact on the company’s financial performance in the near term.

Note also that data center services accounted for just 31% of the company's $427 million in annual revenue. Fiscal year 2024.

Finally, since Sify is majority-owned by CEO and Chairman Raju Vegesna, outside shareholders have very few options to avoid further value destruction similar to the recent rights offering.

At least in my opinion, there is no justification for Tuesday's 100% rally, as NVIDIA's certification is unlikely to have any short-term impact on the company's financial performance.

With momentum-driven traders likely to leave for greener pastures sooner rather than later, I expect the ADS to give back most, if not all, of Tuesday's gains over the next two weeks.

Considering this, I would recommend Sify shareholders to take advantage of the current momentum to offload existing positions.

Risks

Apparently, the biggest risk to my bearish thesis would be a continuation of Tuesday's momentum rally as more traders would be attracted by the hype. However, given that ADS ended the session near the day's lows, I would expect the price to move lower due to declining trading volume.

In summary

The power of AI has struck again, as evidenced by Tuesday's 100% move in Sify Technologies ADS.

However, the fact that the company has become India's first “NVIDIA DGX-Ready Certified Liquid Cooling Data Center Partner This is unlikely to result in any measurable short-term benefits to the company's financial performance and certainly does not justify a nearly $150 million increase in Sify Technologies' market capitalization.

Given this issue, I am downgrading the company's ADS rating from “Sell” to “Strong sale“as I expect stocks to give back most, if not all, of Tuesday's gains in the coming weeks.

Editor's note: This article discusses one or more microcap stocks. Please be aware of the risks associated with these stocks.