STEC's Massive Selloff: It All Hinges on EMC

As with sports, sometimes the best trades are the ones you never complete. [Sep 22, 2009: Missed STEC Purchase by 23 Cents] Former momentum darling STEC (STEC) [July 16, 2009: STEC - Keeps on Tickin', Never Quittin'] was down 30% premarket Wednesday despite good earnings this past quarter. The culprit is guidance due to an inventory issue with EMC (EMC). STEC's wonder product is the Zeus Solid State Hard Drive, and EMC is 90% of that business, so effectively STEC is joined at the hip with any EMC decision.

This massive selloff does provide a compelling valuation; however the gap down Wednesday and residual fleeing of momentum lemmings is going to take time to resolve. The bigger question is how much time does STEC have before competition begins to crowd into the space, and start to compress financial metrics.

In a larger macro picture it makes one wonder about the "technology is the one place company's are spending during the recession recovery" thesis.

Via Reuters:

• Flash memory storage products maker Stec Inc's (STEC) shares shed a third of their value after the company warned that a key customer, EMC Corp (EMC), would carry 2009 inventory into 2010, putting Stec's first quarters results at risk.
• The warning could indicate that the rate of replacing traditional hard drives with Stec's solid state drives (SSDs) in the enterprise storage and server market could be slower-than-anticipated. SSDs are viewed by many as the future of the disk drive industry as they are faster and, unlike hard disk drives, have no moving parts, making them sturdier.
• EMC, which accounts for 90 percent of Stec's Zeus IOPS SSD business, had placed a $120 million order for the second half of 2009, of which $55 million has been delivered, Chief Executive Manouch Moshayedi said on a conference call. The rest of the order is expected to be shipped in the current quarter, Moshayedi added.
• Zeus IOPS contributed $60.7 million to Stec's third quarter total revenue of $98.3 million. Third quarter profit rose to $24.5 million, or 47 cents a share, from $1.2 million, or 2 cents a share, a year ago. Excluding items, it earned 50 cents a share. Analysts were expecting earnings of 47 cents a share on revenue of $96.6 million.
• Gross margins rose to 49.7 percent from 32.1 percent.
• The company forecast fourth-quarter revenue of $101 million to $103 million, below analysts expectations of $106 million. Earnings excluding one-time items would range from 51 cents to 53 cents.
• "We were taken by surprise that (the inventory issue) occurred in the September quarter. We were expecting it in the March quarter," Capstone Investments analyst Jeffrey Schreiner said by phone. "We see the inventory adjustments impacting Stec beyond the first quarter of 2010," Schreiner said, adding that he expects overall demand for SSDs to pick-up again in the second and third quarters of 2010.

Further comments via Barron's blog

• He [CEO] also indicated on the call that sales of the Zeus line in the latest quarter were $60.7 million, below previous guidance of $67 million to $68 million. He also indicated on the call that sales of Zeus SSDs to IBM have also been disappointing; he said that “IBM has not found a way of going and implementing SSDs into the market yet.” He added that demand from Sun Microsystems also is “a little bit slow for us.”
• Moshayedi also insisted that, contrary to some recent analyst comments, the company is not seeing any direct competition in the enterprise SSD market. “What I can tell you is there is absolutely no competition,” he said. “To this date, we have not seen, nor has our customer seen, a product that competes with Zeus|OPS…There is not one single competitor out there. If there were competitors coming in, we would estimate that they would come in somewhere around mid-2010…these reports that competition has come in are absolutely false. None of our customers are going with the competitors.”

That last comment is very interesting, since analysts are already raising alarm flags about competition. Someone is distorting the truth. It seems like an overreaction, but the type of "investor" in these type of high growth stocks does not allow for mistakes.

[Sep 18, 2009: Will STEC Fill its Gap?]

No position

Comments

[Leslie78:]

You are misquoting what Stec's CEO, Manouch Moshayedi, said about IBM. What he said was that "IBM has been doing a lot of press releases on Zeus-IOPS, and Stec has been "participating in sales conferences with IBM, meeting end-user customers, and trying to convinceend-users that SSD is the way to go." The CEO goes on to say, "I think all of these efforts that we put in place will have an accelerating effort on the part of our customer [IBM] and I think the customer might come along sooner than we had originally thought [which was] Q2 of next year."

It's unbelievable how analysts have once again taken a positive earnings report and outlook and turned them into negatives, because it's time for the big boys to sell out of X-sized cap and buy into a different X-sized cap. In this case, it's the small caps now being out of favor while large caps are beautiful Come January we'll experience "the January effect" where the large caps will be loathed and the small caps will be beautiful again--including Stec. This type of market manipulation is shameful. It's why the little guy feels crapped on and why someday the big boys (and analysts) will be mostly unemployed during 10 years of a do-nothing equity markets because no one will want to play with them anymore.

Nov 05 08:50 AM

[rd4sndk:]

leslie... You so right!! Its shameful for a stock that had already sold off on false information (competitive market threat) and to sell off even further after beating both top and bottlom line. Guidance was short of expectations but it didn't warrant a 75% fall in the SP.

I'm under water with Stec by 50% but believe and hoping IBM or some other customer make up the loss in EMC's orders.

There is one area I'm disappoint with STEC in and that is in its ASIC release. The CEO indicated that Mach8 using the FPGA controller isn't cost effective and that it will take the ASIC controller to kick start this market. I would like to have hurd that they were accellerating the release of this controller in order to get out in front of the market. I didn't hear that. Too reminescent of Sandisk and their feet dragging on its technology.

Nov 05 09:33 AM

[proactivetr...:]

The best time to buy GARP is when a growth stock is hammered. Look at the chart and forget the analysts and rumors. This is an exhaustion selling bottom. This is a leader in a cutting edge future of this business product. SSD is the wave of the future and STEC has made the beachead and owns it. I don't know if they are smart enough to keep it, but right now they own it and will for the next year or two. The 1st qtr is just a speed bump in the road typical for new, cutting edge products and small companies with big name customers screwing them around. The shorts have done this, they are finished and now it is time to go the other way. Just watch out for secondary offerings at the next peak. They will screw you at the top every time. The shorts did this with rumors and the weak holders that bought the secondary at 31 and flipped out of it at 40 to the real suckers who got burned as it dropped like a rock. By the way this is the history of STEC and you have to be a little suspicious of the insiders/founders who bailed at 31. Now they can buy it back at 14. And they are shrewd enough to do that.

Nov 05 03:36 PM

[fatpitch2:]

proactive:

Are you seeing insiders buys at current prices?
I am not seeing that, but my information feeds may be slower than yours.....

I see no real activity since Masoud unloaded several MILLION shares back in early August.

Nov 05 07:25 PM

[Mike Trienis:]

Proactive,If you think STEC is at bottom, you need to reexamine your charts and indicators. There is still plenty of room before we see any solid support. Investors were probably looking to doubled down before the earnings report on the advice that the stock hit bottom. Most were shell shocked to find that another steep cliff was straight ahead. Have a look at the weekly chart, it is starting to resemble that of K2 mountain.

Nov 06 01:28 PM

[Robert0713:]

STEC's problem (and for any other "enterprise" SSD supplier) is that the definition of "storage array" has changed since last January. At that point in time, the notion was that HDD arrays would be replaced by SSD arrays, so 10,000 HDD units would be replaced by 1,000 SSD units.

What's happened over the summer is that the new array is 10,000 HDD and 10 SSD front end "disk cache" (I made up the numbers for illustration; the idea is still that far fewer SSD are needed for a hybrid array).

All SSD suppliers have a drastically different demand scenario.

Nov 06 04:33 PM

[Harb1nger:]

Im standing here with my pants around my ankles wondering where the bottom of this mess is. Hind sight says yes I should have stoploss awhile ago but the information pointed to increased profits. Being loyal to this security ( thinking "ok it has to start going back up today" ) has left a very bad loss in my portfolio. You just cant win when you get earnings up and it tanks like a millstone. When will this ship stop taking on water and gain some buoyancy??? Also, with regard to the alleged investigation, must we continue to hold the stock to be part of the class action if indeed those claims prove true?

Nov 07 11:37 PM

[drbob66:]

Well, I'm no legal expert, but it seems logical that you DON'T have to keep holding the stock at this point. The suit would be asking for compensation for MONEY LOST...and, technically, I'm not sure you've lost any money yet. Your losses are "unrealized" at this point. When you sell (at a price lower than you bought at), then you'll have "realized" losses.

As a matter of fact, it seems to me that if you were serious about joining in on any of the multitude of class action lawsuits now being files against STEC, it might behoove you to sell at some point (and "realize" your losses). Otherwise, you might be mistaken for a loyal, diehard shareholder.

One wonders what will happen to these lawsuits if the stock price recovers by the time any legal action might eventually wind up in court. Maybe it won't get back up to $42, but $18 or even $24 might be achievable IF the inventory carryover at EMC turns out be be a temporary setback. Of course, that's a big IF...

Frankly, I had never even heard of STEC until just before their Q3 earnings announcement. One look at the chart told me to stay away...very far away. This stock basically went from $3.50 to $10 in four months...and then soared from $10 to $42 in another four months, without blinking. I see little consolidation of gains in that chart: a perfect cup formed from May 2008 to May 2009...with NO HANDLE at all. Very dangerous situation. Did everyone think this could continue indefinitely?

Anyways, the selling in Sept from $42 to $30 should have been a clear warning signal...institutional investors were cashing out big-time (as were the Brothers Moshayedi) from this unsustainable run-up in stock price.

The biggest question on my mind has to do with the short sellers. This thing was crushed by short hedgies....many of whom, I suspect, had some information beforehand (maybe from EMC?). Someone made a lot of money from this stock collapse, you can be sure of that.




On Nov 07 11:37 PM Harb1nger wrote:

> Im standing here with my pants around my ankles wondering where the
> bottom of this mess is. Hind sight says yes I should have stoploss
> awhile ago but the information pointed to increased profits. Being
> loyal to this security ( thinking "ok it has to start going back
> up today" ) has left a very bad loss in my portfolio. You just cant
> win when you get earnings up and it tanks like a millstone. When
> will this ship stop taking on water and gain some buoyancy??? Also,
> with regard to the alleged investigation, must we continue to hold
> the stock to be part of the class action if indeed those claims prove
> true?

Nov 11 07:39 PM

[stecfollower:]

I definitely agree with your argument about some hedgies already has this information before hand as the equity is brought down very methodically before the earnings.

Nov 12 09:14 AM