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Let Stec's Blowup Be a Lesson to You


Three Minyanville professors weigh in on the company's errors and its dismal earnings.

Editor's Note: The following comments were posted in real time on our premium Buzz & Banter (click for a free trial). This is the reaction to Stec's disappointing earnings, released last night.

Bob Faulkner writes:

STEC, Inc (STEC) was off about 28% in after-market trading last night. No one cares about the quarter just reported when the guidance going forward isn't even in the same ballpark as street consensus. Guidance is for revenue to be $33-$35 million and pro forma EPS of $0.11-$0.13 versus the Street's $80 million and $0.29.

When your biggest customer, EMC Corporation (EMC) (62% of Q4/09 revenue) has an inventory issue, you're heading for a bridge abutment at 100 mph.

This was an issue last quarter with the stock falling by one-third after its conference call. Management announced it had developed a "marketing incentive plan" to address the issue which it claimed could be a great revenue driver. Whoops!

I'll have more on this later in the week but it's definitely a stock you want to avoid.

Michael Comeau writes:

STEC is getting murdered after hours, trading down 20%-plus on a massive first-quarter guidance disappointment. The company's revenue forecast is less than half the consensus Wall Street forecast, with the culprit being an inventory carryover at EMC, STEC's largest customer.

Let this blowup be a lesson to you, because it's one I've learned through the loss of my own dollars and the wrath of my readers:

Customer concentration is a major, major investment risk -- particularly for commodity-type technology companies.

EMC went from being 15% of STEC revenues in 2008 to 45% of revenues in 2009. 15% is extremely high; 45% is simply off the charts in terms of risk. And you can't say you weren't warned -- this number was 38% in the third quarter of 2009, when STEC noted in its 10/Q filing.

In a situation like this, you have a major customer holding 100% of the cards, and a vendor that's one contract loss away from a financial catastrophe. Don't get on the wrong side of these types of relationships.

Sean Udall writes:

Well, as stated a while back in Buzz & Banter, I felt that STEC was coming down into a buy zone. At that time I was thinking the $11s offered good value. Now I'm going to have to say at least 20% (or greater) below the $11.

The guidance it posted was way worse than many projected and much worse than my own numbers, which were in the $50mm range.

Given this sharply lowered set of numbers, it will be hard for many analysts to stay positive. However, this is just the situation that stock traders can take advantage of and wait for a dream price or choose to just stay away altogether. This is also the reason why I have always favored a SanDisk (SNDK) in this space.

At this point I'm going to watch it trade and let chart action likely dictate what I do. However if we see something really reactive, like a break towards $7 or below, I may try some knife-catching.

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Udall has position in SNDK.

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