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business newsIs It Time to Write Off STEC, Inc?
By
Fil Zucchi
Aug 01, 2011 10:15 am
The company reported a lukewarm quarter, lousy forward guidance and the stock got killed. So is it time to write STEC off and rile against management? Yes and no.
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If STEC had a time machine it would no doubt want to fast-forward to mid 2012. The next three quarters are going to be uneventful at best, and business might even worsen some. I’d be surprised if there’s much of a rebound-trade in the stock. But the bigger story STEC told on the conference call, and the reasons it gave for the guidance disaster, were actually very coherent. Basically the competition is giving away low end SSD drives to two of STEC’s top three customers, and STEC cannot and will not compete with that; at least not until it rolls out its next generation of drives, which, according to management, will consist of top technology gadgets selling below the prices of current low end SSDs. But wait, there’s more, these new low-priced wonders will carry the same gross margins the company models itself around.
Of course, after blindsiding investors, it’s easy to dismiss management’s claims; but on the call they genuinely sounded like they were not making any excuses, nor were they trying to hide that they got caught in a very basic – and nasty – product cycle dislocation.
Are they believable? I’d say more yes than no. I guess they might have made up all the details of the “product cycle” problem, but every time they were asked a skeptical question about it, the answers sounded very much legitimate. And then there is this to lend credence that management was indeed blindsided: Just last May 19, STEC’s CEO and STEC’s president bought a combined 438,000 shares in the open market at prices in the high $14’s. These were not option exercises – this was a cool $6.5 million of fresh cash for the two of them combined. This was on top of the already 20% interest the two of them have in the company. In other words, if management is trying to fool investors, they are fooling themselves first.
What I am not willing to embrace, as nonchalantly as management did, is the notion that once STEC’s new products start rolling out, everything will be good again and its competitors will beat a hasty retreat. Once a company loses market share getting it back is not that easy. And often such an effort turns into a price war that does indeed hurt margins.
Despite a small position in STEC and my documented ins-an-outs in OCZ Technologies (OCZ), I am still using both stocks more as markers than core positions to play the mass advent of SSD’s. On most risk/reward measures Sandisk (SNDK) remains by far my favorite way to play the space, especially after the Pliant acquisition. (And, by the way, several market comments on STEC’s call only underscored how early and how massive is the potential of the SSD market.) But, despite “accidents” such as the one STEC suffered on Friday, if SSDs end up being as successful as I think they will, it may be worth hanging onto the marginal players as well.
Positions in SNDK, STEC, OCZ
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