A Potential Winner at a Throwaway Price
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
OCZ Technology (NASDAQ: OCZ) has been virtually hammered into the ground after a gaping miss in the first quarter. The company clocked revenue of $113.6 million along with a loss of 17 cents, thereby failing to meet Mr. Market’s top and bottom line expectations of $115.7 million and 12 cents loss, respectively.
An upbeat outlook for the ongoing quarter and the fiscal year couldn’t save OCZ from the wrath of the Street, and the stock is trading almost 15% down as I write this. However, I believe OCZ is a company with a lot of potential, and such a harsh treatment seems unwarranted.
The good and the bad
The top line growth wasn’t a problem at all for OCZ. The company’s revenue zoomed 54% north year over year. Also, it managed to improve its gross margins to 25.2% in the quarter from last year’s 20%. With such a nice growth trajectory, it might be difficult to believe that OCZ is being beaten badly in post-earnings trading action.
However, escalating costs proved to be OCZ’s bane in the quarter. It witnessed temporary scarcity of power regulators toward the end of the quarter, which pushed up operating expenses a whopping 116% to $41.3 million. As a result, the company slipped into the red and posted a loss of 17 cents on an adjusted basis, wiping out last year’s profit of 1 cent in the process.
A terrific value play
But thinking rationally, I believe that a miss perpetrated by a one-time supply chain disruption shouldn’t be taken as seriously as the Street is taking it. OCZ is getting thrashed, and I believe it’s the right time for a value investor to get in. Well, what else you would do with a company that delivered terrific growth in its recently reported quarter and can get better in the long run.
OCZ is growing, and it’s growing fast. It ranks among the best in the rapidly growing solid state drive (SSD) market. OCZ invests a lot of money and energy in research and development, as evidenced by a five-fold increase in R&D expense in the previous quarter. It has been expanding its engineering personnel along with making a few acquisitions, which would drive its long-term growth. Moreover, OCZ counts memory-making stalwarts such as Samsung and Micron Technology (NASDAQ: MU) among its clients.
The company exited the first quarter with bookings of $140 million, which leads us to the fact that its innovative products, such as Vertex 4 and Agility 4, are finding acceptability with clients. Moreover, OCZ’s new products carry high margins; therefore they will enable OCZ to rake in more cash going forward.
In addition, the company’s core SSD business is doing pretty well, growing 45% from last year. However, OCZ was pinched by declining NAND prices in the quarter. But OCZ isn’t alone in its NAND pain. Its customer Micron had also experienced such a problem in its recently reported quarter. But NAND woes aren’t here to stay for long. Like I said was the case with Micron, OCZ will also benefit from the boom in sales of Ultrabooks that use SSDs instead of traditional hard drives. Chipzilla Intel (NASDAQ: INTC) is going on its Ultrabook mission with full-force, and might release more than 75 models in this year of the Ultrabook. Hence, demand for NAND flash will move skywards, correcting prices in the process and help both OCZ and Micron improve their top lines.
Also, we shouldn’t forget that NAND flash is used for making memory for mobile computing devices such as tablets, smartphones and Ultrabooks. Thus, this stands to gain from the growing number of mobile devices that we are going to see in the future.
OCZ has impressive growth catalysts in its pocket. However, things aren’t quite working on the stock price front for it, as the stock has lost 30% of its value so far this year (15% of it in the post-earnings carnage). But as long as it is delivering growth, it is progressing on the right path and probably the stock price will also follow the company’s growth course over time. Hence, at such cheap levels, OCZ might turn out to be a good buy for those who are looking to make a new addition to their portfolio. The way it appears at the moment, OCZ can be a great value pick for your portfolio.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. 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.