In my recent piece, "OCZ: It's Dead And Done", I essentially wrote that OCZ Technology Group (OCZ), after yet again notifying investors that it would delay filing its financials, was a stock not worthy of investment. At the very best, it's speculation in a market in which buying weekly calls on a solid name is better than buying a flea-ridden penny stock, and at worst it's a waste of money. However, I would like to play devil's advocate for a moment, and I would like to see if there's any hope that OCZ can actually come out of this mess. To be clear, I am not suggesting this will happen or is even likely (I still believe the views in the previous piece), but I am trying to construct a "blue skies" scenario to get a feel for what speculators are looking at, and perhaps give a more balanced view on the name, given the poor critical reception of the last piece.
How Do We Return To Profitability?
This is the ultimate question. My biggest concern by far is that OCZ simply cannot generate enough cash to not only pay the 15%+ interest on its loan from Hercules Technology Growth Capital (HTGC). The company's "break even" run rate is about $110M, as per several statements from management, and right now the company is currently doing $65M - $80M. We do not know what the range for the most recent quarter is, but let's assume the same sort of range as the previous (but as of yet unfiled) quarters.
So, what kinds of growth rates are needed to get to that breakeven level? Well, first let's assume OCZ is at the low end of the range to play it conservatively (I do not believe optimism is warranted here, and I think there's even a slight risk of coming in below the range). If we assume a 20% growth rate Q/Q, we get to breakeven in 3 quarters. A more optimistic growth rate of 30% gets us to breakeven in a mere 2 quarters.
Where do I get these growth numbers? Current CEO Ralph Schmitt noted in a conference several months ago (the webcast is currently unavailable) that this was the target growth rate following the "reset and restructure" part of this turnaround. These numbers are actually pretty believable given the rapid growth in the SSD industry, but of course the problem here is that competitive pressures are still quite great, and OCZ's NAND cost structure is not going to hold up well if it's trying to compete with its own NAND suppliers in the market place.
The bulls of course argue that OCZ's in-house, world-class SSD controller is enough of a differentiator in order to capture the high end, enthusiast segment of the PC market. The question, of course, is whether this is a market that's even going to track the broader SSD growth given that the mainstream trrend seems to be towards "Ultrabook" style products with very slim SSDs or even integrated NAND into the system directly. The rub here is that we won't actually know until OCZ files its financials and gives Q1 2014 results and Q2 2014 guide. This is just one of many reasons why it's tough to recommend OCZ as an investment.
Another problem is that OCZ is also relying on the enterprise market/mix shift. This is a very tough market to gain a foothold into. Not only are reliability - from a product and a supplier standpoint - critical, this market is coveted by many large, sophisticated players. So, on the first point, suppose that OCZ had an amazing drive with a beautiful software stack - right? A big issue with enterprise customers is that OCZ may not be able to guarantee enough supply thanks to the way the NAND flash business works. The guys such as Fusion-io (FIO) that really play up the software side of things (and even they aren't exactly doing so great financially) typically have good NAND flash supply agreements, and are also very skilled at handling NAND that this becomes less of an issue. OCZ has no such supply agreement in place, and as a result, it is difficult for enterprise customers to really feel "comfortable" using OCZ as a supplier.
There seems to be a remote - but not zero - chance that OCZ can return to profitability over a couple of quarters before burning the rest of their cash and being handed over to Hercules for pennies on the dollar relative to today's stock price. My best advice would be to stay away until there are clear signs of a turnaround in place. This means that revenues need to be moving up - and quickly (20-30%) - and gross margins need to be flat to up while this happens. You may not "catch" the bottom in this case, but you certainly mitigate the risk of having the stock go to zero following a delistment as the turnaround will actually be underway.
That's really the key...we don't know anything right now other than that OCZ is out of cash, has a bad loan, and could find it difficult to grow sales in time to hit breakeven - let alone profitability - targets. The SSD market is controlled by the NAND flash players, and without some real, marketable differentiation (a shiny controller is not marketable outside of a few tech geeks), it's going to be pretty unlikely that OCZ survives over the next year. But if there are signs that it will - which means released financials, quickly narrowing loss, path to profitability - then, and only then, is it time to buy in. Anything before then is reckless gambling and I can't in good conscience recommend it.