Cray

Source: Cray

Cray (NASDAQ: CRAY), the maker of supercomputers that are used for scientific research, weather modeling and cybersecurity, has been firing on all cylinders lately. The booming business has pushed the stock to new highs not seen since 2004 -- let's take a look at the biggest developments that have been propelling the stock forward, and evaluate if investors should be interested.

The big three announcements
Cray's rally started with its most-recent earnings results for 3Q15, announced at the end of last October, which sent the stock 28% higher. Not only did the company handily beat estimates for both the top and bottom lines, but management boosted its 2016 revenue guidance 7% higher than what investors were expecting, due to new processors and products expected to drive sales and upgrades.

Then, on January 12, management pre-announced 2015 results, specifically noting that revenue was going to come in between $720 million and $725 million compared to the previous guidance of $715 million that they gave during the last quarterly earnings call. Although 2016 revenues were unchanged from the previous boost, it was enough to give the stock an additional 8% rally.

Finally, shares jumped most recently on January 25 with the announcement of a $36 million contract to upgrade and expand its existing supercomputer products at the European Centre for Medium-Range Weather Forecasts. The contract is relatively small -- at only 5% of current revenues -- but it was enough to get investors even more excited, and push the stock up an additional 10% for the day.

Things are good, time to buy?
The company is now up nearly 60% since its last release on October 29 and the subsequent flow of positive news. Anytime a company, especially a small-cap tech company, puts together consecutive surprises like this, I get interested. It shows that the company is building some great momentum, and the market has been continually discounting its potential growth. So should investors take a piece of Cray?

Growth prospects look great, as analysts are predicting sales to grow 22% next quarter, and 28% for 2015, before slowing a bit to 14% growth for 2016. Earnings per share look even better, as they are expected to double this year, and grow 34% the next. However, take these estimates with a grain of salt as only three or four analysts cover the stock.

As with any investment, always consider the risks. For Cray, there's something that I personally consider a big risk -- government exposure. In its annual reports, Cray notes that the U.S. Government comprises approximately half of its revenue. That's a lot, but not even the whole story, because it only notes United States government specifically.

Revenue also comes from other worldwide governments, or customers that are funded by governments. Indeed, under risk exposures in its 10-K, Cray states: "Government agencies and government-funded scientific research institutions around the world comprise a large portion of our customer base."

Further, management noted in its last earnings call that "commercial customers" (i.e. private or non-government) comprised only 15% of revenue in 2015. However, commercial customer revenue as a percentage has nearly doubled from 2014.

Companies that are dependent on government contracts are subject to a unique set of risks. For example, the sales process can be slow and arduous, and subject to more bureaucratic approval processes, such as congressional appropriations in the U.S. But the flip side is that these contracts can be more stable and recession proof compared to corporations that can back out of multi-year deals if they hit a rough patch.

Another investment risk is the stock's valuation has become less attractive after the recent rally. For small growth stocks, I believe investors should not put as much weight on valuation, but it should always be kept in check. Cray is currently trading at around 18 times trailing earnings -- not dirt cheap, but certainly reasonable for a growth stock. For comparison, the computer hardware industry is trading around 23 times earnings with only 12% year-over-year revenue growth for next quarter, while the S&P 500 is still at a P/E ratio of 20.  

Finally, keep in mind that the next earnings announcement for Cray is right around the corner, on February 11, 2016. It can always be a bit of a gamble to buy a stock right before earnings, as the market shifts to compensate for new figures. So more-conservative investors might want to wait it out and get some more information and confirmation, while investors with a larger risk appetite, or those looking to own the company for a long time frame, may not care as much about short-term earnings swings.

Chris Kuiper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.