A Lesson or Two from OCZ
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Beginning
Shares of OCZ Technology Group Inc. (NASDAQ: OCZ) have fluctuated more than John Kerry in the 2004 election over the past few weeks. Prior to releasing its earnings, shares of OCZ quickly climbed up on expectations its earnings would beat.
The Earnings
OCZ's earnings weren't so great. Analysts called for EPS to come in at a loss of $.12. It didn't, it came in much worse at a loss of $.17 a share. This sent the stock down from over $6 to $4.25. Those who bought in right beforehand were killed (at first). So this is where lesson number one comes in -- always be cautious when buying a small-cap right before earnings. While the returns can be quite nice if you get it right, if you are wrong it's going to sting. While OCZ does have long-term potential, it has a cash-generating problem, which is why shares sold off heavily when it burned through more cash than expected.
BUYOUT RUMORS!
While OCZ reported bad earnings, its shares quickly rallied up to over $8 a share. Why did it rally? Because, according to Bright Side of News (brightsideofnews.com), "the rumors that OCZ Technology is being acquired by Seagate raised quite the steam last week, sending the stock soaring up. We can now report that according to sources close to heart of the matter, 'the deal is done.'"
Well, not really, no. The idea was that Seagate Technology Plc (NASDAQ: STX) was going to buy out OCZ for $1 billion, which is almost 3 times the market cap of OCZ right now. The speculators assumed that after Seagate reported earnings it would announce that it is going to buy OCZ. Earnings time came around, Seagate disappointed once with bad earnings, then again with no announcement that it was going to buy OCZ. To be fair to OCZ, the CFO of Seagate Pat O'Mally did say "(Seagate) would be interested in buying an SSD maker that has a ‘significant’ share of the enterprise market." So OCZ bulls have made the case that OCZ could be bought out in the near future. As of right now OCZ is trading around $5.75, well of its high of $8.36.
Another Lesson
Another lesson to be learned from this is that whenever there is a buyout rumor, all the money made is made by those who already owned the shares beforehand. Whenever you see a buyout rumor, I would recommend staying away unless you want to risk losing a lot of money. Many who bought it prior to Seagate saying it wasn't going to buy OCZ lost a lot of money.
OCZ and Friends
Both OCZ and Seagate did report disappointing earnings, but Western Digital Corp (NASDAQ: WDC), the rival of Seagate, reported very strong earnings and great guidance going forward (management expected earnings of $10 a share for the new fiscal year, compared to the average estimate of $8.06 a share). This sent shares of Western up 20%.
So it's not all bad news in the hard drive industry. Shares of Western and Seagate have been hit hard due to slowing PC sales as the global economy weakens, but IDC expects PC sales to pick up in Q4 of 2012. OCZ has several competitors in the SSD market, such as Intel (NASDAQ: INTC), which will be a problem moving forward. Intel has far deeper pockets than OCZ and is already a very profitable company. While that could be taken to mean Intel has the possibility of buying up OCZ, Intel's product line is already packed with similar OCZ offerings. And, upon sleuthing around message boards of PC gamers looking to upgrade, it appears Intel is more reliable than OCZ (http://www.tomshardware.com/forum/344274-31-choice-intel).
OCZ's prospects
Now OCZ does have some great growth prospects in the SSD (Sold State Drive) market.
The solid state drive (SSD) market is growing at a fast clip and will more than double by 2015. OCZ manufacturers SSD and other PC components. According to analysts’ estimates, OCZ has a PE of 42.5 for this fiscal year and will have a PE of 7.2 for the next fiscal year. Combine that with a book value of 1.94 (compared to the industry average of 5) and OCZ could be a great long-term play.
The big question is whether or not you think OCZ will be profitable soon. OCZ may have to issue new shares in order to stay afloat, which would hurt its stock price in the near term, but would help it to keep funding its way to a profitable 2013. While OCZ is expected to post a profit this fiscal year, last quarter’s earnings put a damper on that idea. So with OCZ, the question is will it be able to turn a profit relatively soon. Over the past 5 years EPS growth has been 38% and revenue growth over the same period of time is 25.3%.
OCZ is a growth play trading at very low levels if it does perform as expected. Wall Street is very bullish on this stock, while the Motley Fool CAPS community pegs it at 2 out of 5 stars. Personally if you want to get into this stock I would take a long-term outlook, because it has great potential but short-term problems will arise that could cause you to sell too soon.
Is a buyout possible?
OCZ is a possible buyout candidate, but don't use that as a reason to buy in. Use that as more of a floor, being that if this stock falls considerably, it would just look like an even better buyout candidate and could be bought out by a bigger player.
Conclusion
The purpose of the piece is to remind investors that rumors about buyouts and random speculation on earnings can lead to a smaller wallet and sadness. It is better to invest in a company for its long-term prospects and fundamentals (which I recognize that each of these companies have) and let the speculators gamble their money away based on "facts" they heard from their uncle's best friend's wife who knows a guy, than let your money die. A possible recovery in the PC market in the future plus a booming SSD market could make these companies worth looking in to (particularly OCZ).
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Western Digital. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
