Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

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.

For more trading commentary, ideas & insights from 30+ top traders take a FREE 14 day trial to Buzz & Banter. You'll get insights you can't get anywhere else. Learn more.
Udall has position in SNDK.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos