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Stec Sold the Sizzle, Not the Steak

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And that came in the form of solid state drives (SSDs) that attracted EMC and IBM.

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STEC's (STEC) stock demise has to rate up there as one of the great Roman candles of recent technology-industry history. Only six months ago it was being highlighted by sell-side analysts as being one of the best growth and margin stories available to investors. One portfolio manager went so far as to suggest in a Business Week profile that, "STEC's SSDs are apt to become the industry standard."

Who knows, that may still be true some day but the reality is that a lot of people were drinking the Kool-Aid last year with the stock peaking in early September at $41.84 per share or a market capitalization of about $2.1 billion. That's a whopping 7.8-times trailing revenue; up there in Google (GOOG) territory.

Since then, it's lost about 75% of its valuation in two very high-profile stumbles, and that begs the question, "Should investors have seen this coming?"

We all know hindsight is 20/20, but in this case I think it's another example of investors' convincing themselves that the emperor's new clothes were really something special.

What I mean by that is STEC is essentially a memory module manufacturer. It takes commodity products and packages them into configurations that meet the needs of server and/or storage OEMs. Not too complicated in the great scheme of things.

However, STEC found a way to sell sizzle rather than steak in the form of solid-state drives (SSDs).

For more than a decade it's been the dream of NAND flash manufacturers that "someday" SSDs would replace magnetic rotating disks (HDDs) as the principle storage medium for computing. It's been a long road but, thanks to a pricing bloodbath over the last year or so, the viability of that substitution has moved into the ballpark for some applications. SSDs have no moving parts to break so there's an obvious advantage and their read-times are much faster that HDDs. However, they also cost quite a bit more when we're talking about terabytes or petabytes of storage along with the need for redundancy. Consequently, they're not for everybody.

STEC comes along and designs an SSD specifically for enterprise class applications (i.e. highly reliable) and attracts leading storage sub-system OEMs like EMC (EMC) and IBM (IBM) to include it as part of their array (no pun intended) of storage solutions. From an investment perspective you'd have thought it found a way to spin straw into gold. Sell-side analysts were drooling on the second-quarter 2009 conference call at the potential of replacing some 30 million HDDs attached to servers.
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No positions in stocks mentioned.
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