TSS, Inc. (TSSI) stock intrinsic value fair value estimate & owner earnings analysis

TSS, Inc. assembles, configures and tests data-center equipment for its customers. From 2025 this work is done at a leased plant of 212,793 square feet in Georgetown, Texas. It also buys hardware and software for customers (procurement), and it maintains modular data centers (facilities management). The business depends almost entirely on one customer. A large US-based computer equipment maker (OEM) provided 99% of revenue in 2025 and 2024, and 96% in 2023. The business changed in October 2024, when TSS signed a long-term agreement with that customer to integrate AI server racks at guaranteed minimum monthly volumes. TSS spent about $40 million fitting out the Georgetown plant with power and cooling. That was well above the $20 to $25 million it first planned, because the customer asked for more capacity. The landlord contributed $6.8 million, and bank term loans financed $25 million. In December 2025 the agreement was repriced for the higher power use and capital spending, and extended by two years to about 2032, with automatic one-year renewals after that. Either side can end it on 180 days' notice. If the customer ends it that way, it must still cover the plant's costs and the loan payments. Revenue rose from $54.4 million in 2023 to $245.7 million in 2025. Most of that was low-margin procurement pass-through ($197.5 million). Rack integration brought in $40.3 million and facilities management $7.9 million. Our measure of earnings is the cash the business produces for its owners after the spending needed to keep it running. On that measure TSS earned roughly nothing from 2016 to 2023. It earned $0.24 per share in 2024 and $0.31 per share in 2025. We made three accounting judgements, all of which affect the result: (1) We treat the Georgetown build-out as spending for growth. We charge annual depreciation (about $3.8 million in 2025, running at about $5 million a year in 2026) as the cost of keeping the plant up. (2) We removed the landlord's $6.8 million payment and a $10.5 million year-end surge in customer prepayments from 2025 cash flow. Both were timing items, and the prepayments reversed in the first half of 2026. (3) We excluded the $7.9 million non-cash tax benefit that inflated 2025 net income to $15.1 million. 2025 also included about $1.3 million of one-off items: accelerated recognition of a customer reimbursement, a waived factoring fee and a local grant. We base the valuation only on the two years since the change, which gives a starting level of about $0.27 per share. That is roughly $8 million a year: about $6 million from operations and about $2 million of interest on cash. The first half of 2026 supports that level. Revenue fell 37% as procurement shrank, but gross profit edged up to $16.8 million from $16.4 million. Owner earnings ran at about $0.30 per share annualized. We still start the base case at $0.27, below 2025's 28% growth per share, because nothing in the filings shows volumes above the contract minimums. Taxes and cash matter here. TSS has about $54 million of tax losses to carry forward, so it should pay little cash tax until about 2031. After that we apply a tax rate of about 25%. At June 2026 it held $67.7 million of cash against a term loan of about $16 million that is fully paid off by January 2030. We count about $50 million of that cash as belonging to shareholders. The rest is short-term money owed to suppliers, because the company collects from its customer through a bank factoring program before it pays them. Future values are discounted at 6%. Base case, $2.67 per share: the rack agreement runs to about 2032 and renews yearly until the Georgetown lease ends in May 2035. Operations earn about $6 million a year with no growth, and the cash earns about $2 million. After 2035 nothing we can point to in the filings keeps the extra earnings going. Before the AI contract the business earned about zero, so the story ends with the cash, not with a permanent earnings stream. Bear case, $1.59 per share: the customer uses its right to end the agreement early, in 2027. It still covers the plant and loan costs, but TSS is left with only its old business, which has historically earned nothing, plus interest on its cash. Almost all of this value is the cash. Bull case, $3.47 per share: rack volumes rise above the minimums under the new pricing, and operating earnings grow 15% a year for three years to about $9 million. 2025 growth was 39%. The relationship then continues through the lease's renewal options to about 2040. The main risk is dependence on one customer. Even the bear case assumes that customer honours its obligation to cover costs after ending the agreement early. If it instead let the agreement lapse when the term ends, TSS would be left paying rent until 2035 on a plant it does not use. The company's own filing says a modest change in the customer's buying patterns could materially hurt results. The old Round Rock facility is empty until its lease ends in March 2029. Spending on equipment in the first half of 2026 ($4.6 million) ran above depreciation. If that continues, our charge for keeping the plant up is too low. We also could not review the company's amended quarterly report for the second quarter of 2026.