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OCZ Raises Guidance to Drive a Magnificent Short Squeeze


OCZ Technology is high-risk, but the SSD firm is also squeezing the shorts on an impressive streak of good news.

OCZ Technology (OCZ) has the dubious distinction of being the most controversial company in the booming solid-state drive industry.

At last count, 19 million shares, or nearly 41% of its float, were sold short, making it a true darling of the bears.

Among their issues with OCZ: a weak or even non-existent enterprise-customer list, lousy cash flow, a CEO with a criminal record, and a history of shady marketing practices.

However, OCZ is now riding a public-relations winning streak, culminating in today's guidance raise, that has taken the stock up nearly 80% off its October lows vs. a 13% gain for the Nasdaq (^NDQ).

Let's take a look at the timeline:

October 5 -- OCZ announces weaker-than-expected second-quarter earnings, but revenue beats consensus and guidance is raised.

On the conference call, in an obvious effort at fending off bears, OCZ names a list of OEM partners, which includes Dell (DELL), Hewlett-Packard (HPQ), SGI (SGI), and Quanta. OCZ also identifies some of the end-users of its enterprise drives, which includes the likes of AOL (AOL), eBay (EBAY), Honda (HMC), and Bloomberg.

October 25 -- The company announces that its board of directors has approved a shareholder rights plan (a.k.a. poison pill), which would allow the company to fend off hostile bidders. In the press release, OCZ management notes the following:

"The Plan was not adopted in response to any bid to acquire control of OCZ. However, the board of directors believes that, based on peer valuations and recent representative transactions, the value of the business is not reflected in the current market price of the Company's stock. Accordingly, the board of directors believes that adoption of the Plan is in the best interests of all the Company's shareholders."

October 26 -- OCZ issues a press release to congratulate LSI (LSI) on its acquisition of Sandforce, which supplies flash controllers to OCZ. The company notes that "because OCZ and SandForce previously contemplated this scenario, we expect that this combination will have no material impact to our existing product lines or business."

This helps ease concerns that Sandforce could cease doing business with OCZ, which acquired flash-controller company Indilinx in March of 2011.

November 9 -- OCZ says that it expects its full-year revenues to be towards the top end of its last-issued guidance of $320-350 million.

November 23 -- In a positive review of OCZ's Octane drive, Anand Shimpi of the influential technology web site Anandtech praised OCZ's corporate turnaround, saying the following: "I have to hand it to OCZ's CEO, Ryan Petersen, I never thought he'd turn the company around in the way that he did."

In years past, OCZ had such a lousy reputation that Anandtech wouldn't even accept its advertising dollars.

And that brings us to today:

December 1 -- OCZ announces that preliminary third-quarter (ended in November) revenue is $100-105 million, the midpoint of which is 15% ahead of the $89.4 million consensus. Full-year revenue is now expected to be above the $320-350 million range vs. a consensus of $342.6 million.

In the press release Mr. Petersen said:

"We expect to report record revenue in Q3'12, driven primarily by increased traction for our enterprise and server SSD offerings along with initial shipments of our new PCIe-based offerings. Based on the exit bookings rates from November, interest in these products is exceeding our expectations, due to accelerated adoption of our SSDs by server OEMs and enterprise customers."

OCZ also filed a shelf offering with the SEC to raise up to $150 million. Here's an excerpt from that release:

"Given the current hard disk drive shortage and the potential for material additional demand for our enterprise and server SSD products, we filed a shelf registration statement that provides OCZ with the flexibility to augment working capital should such demand materialize," said Ryan Petersen, CEO of OCZ Technology. "We do not require an equity financing for working capital to meet current demand levels."

That's a pretty nice hint that demand for OCZ drives could get even stronger.

Now, I've been enormously bullish on flash memory, and that's why I've been long and strong with Sandisk (SNDK) (see: Why You Should Bet Big on Sandisk).

But OCZ could be the ultimate no guts, no glory bull trade into year-end given the company's heavy exposure to the booming SSD side of the storage market, which is heating up due to both technological breakthroughs and the Thailand floods, which interrupted the hard-disk drive supply chain.

In addition, I expect Apple (AAPL) to eventually phase out hard-disk drives (albeit at a slower rate) the way it did CRT monitors and floppy drives in years past -- forward-thinking moves that the rest of the industry subsequently copied. Apple's already begun the process by eliminating the Macbook and sliding the SSD-equipped Macbook Air in its place as the entry-level Apple laptop. Looking forward, I would not at all be surprised at all to see the Macbook Pro line switch to SSDs as standard equipment in 2012.

Due to cost constraints on low-end models, PC-makers like HP and Dell will never completely eliminate hard drives. However, as they copy Apple's lead, they will be pushing SSDs more aggressively in the years to come, dramatically expanding the SSD market.

I will say this: Playing for a short squeeze with stocks like OCZ is not a kid's game. Though the company appears to have cleaned up its act, that high short interest equals controversy, and controversy equals extreme volatility.

Nonetheless, I'm hanging on as OCZ is in the right business at the right time, and I'll be looking to buy even more on dips.

Twitter: @MichaelComeau

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Position in OCZ,AAPL,SNDK
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