OCZ: Please Show Us The Numbers

Feb.25.13 | About: OCZ Technology (OCZ)

I want OCZ Technology Group (NASDAQ:OCZ) to succeed. The company, which eventually turned out to be run by a questionable character, has lost a lot of people a lot of money. The new CEO in place, Ralph Schmitt, genuinely seems to want to get the company back on track. After listening to various conference calls and reading various press releases, the sense I get from the current leadership is one of a genuine desire to create value for the shareholders, subdued by the perils of the firm's financial situation.

With $9M in cash, $7M in debt, and a lot of inventory built up (which will be heavily written down), the situation looks pretty bad. OCZ absolutely needs to raise funds, and it needs to do so quickly before time runs out and the company ends up doing a liquidation sale. The shareholders deserve better than this, and I actually believe that management believes this, too.

However, good inentions aren't enough. The company still hasn't filed with the SEC either the 10-Q from nearly 6 months ago, or the 10-K that should have been out right about now. While the company was good enough to give a preliminary update on what the cash position looks like and what the revenue numbers for the last two quarters will be, the ranges are very wide ($65M - $85M for both). Further, without these filings, OCZ will likely be unable to either issue shares or debt on reasonable terms. Right now, it's borrowing against Indilinx, which is the company's biggest hope to differentiate itself in the market.

Extension After Extension

OCZ keeps getting "lucky" and nabs extension after extension with the SEC. Investors had hoped that everything would be laid on the table by February 28th, but that, unfortunately, didn't happen. Now investors need to wait until April at the very earliest in order to find out the future of the company that they're holding a stake in.

How can shareholders be expected to put up with this? It's been months, and the audit work has apparently been going on for months. Could the books have been so horrifically cooked that it takes this long to figure out how many SSDs the company sold? What the heck is going on?

I am frequently labeled an OCZ basher; I'm not. I think that speculators who know what they're doing can make plenty of money off of this stock on the long side, but my fear is that many newer investors will simply "buy and hold", hoping for the day that OCZ finally "comes back". It could happen. Ralph Schmitt and his team could set the ship right, and maybe this could be a multi-bagger. However, the fact that it's taken this long to file financials, coupled with the fact that the market itself is highly competitive and biased against those without NAND flash fabs makes it a very risky bet, even at $1.83/share. There is a very real chance that this goes to $0, although I am hoping that the company ends up being able to just issue ~10M shares at about $2/share for $20M or so. This will dilute existing shareholders significantly (current float is ~67M), but it could buy the company some time.

But what would it do with this time? An acquisition may be in the cards, but it's really tough to try to come up with a sum-of-its-parts valuation of the company, especially as the fruits of some acquisitions are only beginning to blossom. The consumer controller technology is good, and the company has an enterprise-focused controller coming later this year, but it's just unclear how valuable this all is in this environment.

It's All Just Uncertain

That's my problem with OCZ. It's not the management or the technology, it's the uncertainty. We don't know how OCZ really plans to survive the next several quarters, and we certainly have no idea what the financials look like. Will there be dilution? Can the company get debt on good terms? Can the company's enterprise business even succeed?

For $1.83/share, your downside is...$1.83/share, so if you're not putting too much money into this thing, then you *maybe* might be able to make some money longer term speculating (although the real profits are in trading this in the short term, but that requires extreme sophistication and risk tolerance). However, if you're really wanting to speculate on the turnaround, then wait until OCZ announces some sort of dilution. The share price will get cheaper for a while, and at that point, the company may have a chance to survive.

Until then, only touch this stock if you really know what you're doing. The risk level here is extreme, and I'd probably recommend trading 3x leveraged ETFs rather than this for pure trading, but some people just enjoy the thrill.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I do not intend to take a position in OCZ.