The Cheapest Growth Stock I've Ever Seen
Nikhil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Buying growth stocks is dangerous business. While it's easy to buy into the next growth story, people don't tend to realize how hard it is to predict big and grand things like "market positioning" and "industry growth" for a company. When you add in expensive prices, you can often get big flops on little information (see Mako Surgical's 3-month 32% dive). There are some stories, however, that are just too hard to pass up.
OCZ Technology Corp. (NASDAQ: OCZ) is one example of this type of can't miss story. The solid state drive industry has been crushed recently, with most companies down 20%-40% in the last 3 or 4 months (in the last 3 months both OCZ and Fusion-IO (NYSE: FIO) are down 40% with LSI Corp. (NASDAQ: LSI) following close behind, down 24%). Here are 4 reasons to bet on OCZ Technology's resurgence and separation from the competition:
1. Industry Growth
OCZ Technology is in a growing and thriving industry. Solid State Drives have huge market potential due to their better performance, reliability, more efficient use of power, and lower heat generation. Worldwide SSD sales are expected to grow at a rate of 51% compounded annually until 2015. Fun Fact? OCZ Technology's expected revenue for this year is roughly equal to the total size of the SSD market in 2008. Now THAT is what I call growth! By revenue, OCZ has roughly double the market share of Fusion-IO, a major industry competitor.
2. Management Quality and Actions
Recently management has expressed a lot of confidence in the company with 4 directors each buying 40,000 shares in April. Repurchases, however, only tell part of the story. Management has shown plenty of times that they are fixated on the business and its competitive positioning as the SSD market begins to consolidate.
Realizing that LSI Corporation's Sandforce controllers had a near monopoly, selling controllers to virtually every SSD maker (including OCZ itself), OCZ Technology acquired Indilinx to compete. Performance tests seem to indicate that Indilinx controllers are outperforming the Sandforce controllers, and OCZ's movement into controller production gives it a vertical integration that is an inherent advantage in the battle for market share (see OCZ's expected 30% gross margins this year for the results!). Management has really pushed margins forward, abandoning the previous memory modules business for bringing margins down and negotiating contracts with suppliers to get better prices for parts they had previously bought on the spot market.
Need more evidence of OCZ's cool management culture? Meet the CEO: Ryan Peterson. Co-Inventor of much of OCZ's technology, Peterson has a unique background. He was an aspiring musician and got his start as an employee at Micron (now one of OCZ's suppliers). As a founder of the company, he's still involved as Chief Executive Officer and Chairman of the board, and his experience in the industry is of huge importance.
3. Quality Products and Competitive Positioning
I've already pointed out that the industry is growing at a stunning pace, but high growth is often more trouble than its worth. Scores of new competition has popped up in this industry and it's very likely that the next decade will be a bloodbath as the industry consolidates and solid state giants emerge. While OCZ is growing at insane speeds now (expecting 80% revenue growth this year), it is crucial that its products are competitive enough to lift it above the competition in the future, especially in a growth industry where nothing but the future really matters. To figure out how OCZ's products are doing, I went to review two review sources. Thessdreview.com seemed to be a more informed source, but I also wanted to look at Amazon.com's open reviewing for a more uninformed consumer opinion.
The Vertex 4 Drive
You can see the number of amazing reviews it has gotten in the last two months on OCZ's website, but here are a few of the highlights: "Vertex 4 is truly the first of its kind." It has a 5 year warranty and contains the new Indilinx Everest 2 Processor (straight out of their Indilinx Acquisition!). According to Thessdreview.com, "Vertex 4 not only returned the highest overall score we have seen in a standard SSD yet, but also, it’s high sequential write performance is the highest we have seen to date by a long shot.” Amazon reviews gave it 4 stars (with 23 5-star reviews to 6 1-star reviews). The 5-stars were complimenting Vertex's amazing speed and its 40% faster input/output compared to Sandforce Controlled Drives (Note that Sandforce is Indilinx's major source of competition, so this is a great sign). The 1-star reviews trashed Vertex 4 for incompatibility with certain computers and the fact that a few users had to use their warranty because their first model didn't work.
OCZ's competitive position grows as it introduces new products alongside its Vertex 4. The Agility 4 is the "value alternative" that OCZ offers. It seems to be fairly nice as the reviewer said, "If you want my opinion, these will be off the shelves faster than they can stock them." Frankly, after reading that I started to get a bit suspicious about whether the reviewer was just sweet talking all SSDs (it wasn't).
The Intrepid 3 is the new Vertex 4 type product of the Enterprise market, the big boy market that OCZ is just starting to break into. OCZ has been making strides into the Enterprise market with the acquisition of Sanrad, an enterprise storage and datacenter technology company, and a recent (announced today) agreement with Microsoft's (NASDAQ: MSFT) Windows Azure Team to provide solid state drives for their cloud storage services (this announcement has OCZ up 8% today).
4. OCZ Is Stunningly Cheap
What was that about the CHEAP part? Hopefully I've made it pretty clear that OCZ deserves a premium price. The market disagrees. Fears about OCZ's cash burn rate and lack of profitability (very related problems) are keeping the stock price bogged down. To address those fears I'd argue that OCZ Technology would be extremely profitable if it wasn't spending so much cash on R&D... OK, so clearly that's the cash burn issue.
Profitability and OCZ's Cash Burn are the same problem, and in my opinion they are good problems. OCZ is a growing company in a competitive industry. In order to sustain organic growth, it needs to spend copious amounts of cash to research, and it's not like research isn't producing results. They already have Indilinx controllers that beat Sandforce controller performance tests, they are expanding with a plethora of new enterprise products, and they expect an early release of two new controller platforms next year. I'd call that progress.
To further assuage fears, OCZ is guarded from financial trouble by its recent capital raise. It has cash after paying off total liabilities that, at current cash burn rates, will last for the next two years. From management's guidance on the Q4 conference call, we can expect non-GAAP profits by Q2 of this year, so don't be too much of a worry wart.
Right now, OCZ sells for less than last year's revenue. To give you some context for that, competitor Fusion-IO sells for 9x last year's revenue even after having witnessed a fall just as hard as OCZ's. Yes, Fusion-IO is barely profitable, so cash burn fears don't effect it nearly as much, but you can see the upside possibilities.
Don't Miss Out
Last year, OCZ guided for 300-330M in revenue. OCZ ended the year with 360M in revenue. This year, management guided for 630-700M in revenue and the stock plummeted, clearly focusing on higher cash burn rather than huge scaling up of revenue. Again, however, we can expect OCZ to beat guidance as in their conference call, the CEO admitted that guidance did not include controller or SANRAD revenue because they were tougher to calculate. Admitting that controller revenue was growing at twice the rate of OCZ's core SSD business, the CEO is clearly understating OCZ's market potential. OCZ and the Solid State Drive industry have plenty of room to grow, so don't miss out on the Cheapest Growth Stock I've Ever Seen.
(I have made a CAPS pick on OCZ if you would like to track my performance)
shamapant has no positions in the stocks mentioned above. The Motley Fool owns shares of Fusion-io and Microsoft. Motley Fool newsletter services recommend Microsoft. 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.