Would you Speculate on This Value Play?
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have been an OCZ Technology (NASDAQ: OCZ) bull for some time now. The reason – the company plies its trade in the fast growing solid-state drive (SSD) industry and has seen its business zoom towards the sky over the past couple of years. Apart from this, I really like the way OCZ had been improving its cost structure and expanding its gross margin as you can see in the graph below:
A combination of these three factors – a rapidly growing industry, an impressive revenue curve and a tight cost structure are three things which I look for when scouting for stocks for the future. And OCZ satisfies all these aspects. But the company has been disappointing on just one front, and the most important one – stock price performance.
OCZ has become synonymous with volatility. The Street has a knack of punishing OCZ very, very harshly whenever it misses estimates or falters on guidance as we have seen after the last two quarterly reports. And OCZ has a knack of rising like the Phoenix on buyout rumors.
Ever since my previous post on OCZ a couple of months back, I have seen the stock swing wildly. Late in July, it rose as much as 30% in a single day on the back of rumors that it would be purchased by Seagate Technology (NASDAQ: STX) as the hard-drive maker might use its cash hoard on improving its SSD offerings. And most recently, OCZ crashed almost 20% after it lowered its expectations for the just-concluded second quarter. Hence, OCZ now seems to be more of a speculative play than a value play to me now.
Poor Execution = Unrealized Potential
The company has the potential to be a good long-term performer, but it has simply failed to satisfy the Street’s expectations of late. And over the last two quarters, OCZ has been taking shelter behind excuses. I agree that the company has been burning cash and its earnings have been in the red, and I would give OCZ some leeway on that since it is still young and is spending on marketing and R&D efforts.
But reasons such as scarcity of power regulators pushing up operating expenses and leading to a gaping bottom line miss and shortage of NAND flash supply seem inexcusable. These seem to be operating blunders on OCZ’s part and raise question marks over its execution. When you aspire to be a part of the mobile computing revolution, it would be prudent to enter into long-term supply contracts for raw materials and keep your munitions ready in adequate quantities. But OCZ failed here.
And according to me, OCZ should have gauged how NAND flash supply would play out. In its last reported quarter, Micron Technology (NASDAQ: MU), which sells NAND flash memory, had said that it expects prices of NAND products to improve in the second half of the year. Now, that was only possible if either demand improved dramatically or supply fell. But it seems that NAND makers tightened their supply lines in order to provide some support prices and this proved to be OCZ’s bane.
OCZ is working to salvage the situation and I hope they execute it well this time. It is looking to put in place new process nodes for resolving the deadlock and also said that it ended the quarter with impressive bookings. However, I would really love to see OCZ’s management walk the talk.
A Couple of Positives
But, we should also see that OCZ is trading at dirt-cheap levels and is still expected to grow revenue at a fast clip in the future. According to Bloomberg, analysts expect OCZ’s top line to grow as much as 114% by the end of the next fiscal year. Hence, if management gets its act together and brings OCZ back on track, those who invest at this stage might be in for a good time over the long-run.
Moreover, rumors of a buyout by a bigger player such as Seagate or Micron have been doing the rounds for quite some time now. Seagate might look to add to its SSD arsenal by acquiring OCZ while Micron, which recently agreed to acquire Elpida, might also be thinking of doing the same. If such rumors do materialize, OCZ’s stock would most probably go for a trip to the North Pole.
Hence, from an investor’s standpoint, OCZ appears to be a risky proposition at the moment. But the stock might find catalysts in the form of a buyout or improved operations going forward. If you are willing to take this risk, you might reap rich rewards either in the near term (by way of a buyout) or in the long run (through proper execution of operations).
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