Anybody following the stock or the solid-state drives (SSDs) industry has probably seen the drama with OCZ Technology (OCZ) over the last few weeks. Several influential journalists reported that a deal was done with Seagate Technology (STX) for over $1B, valuing the stock at close to $15.
Unfortunately weeks have passed without a deal announcement and the stock that shot up to over $8 in after market trading on July 27th now trades under $5. On top of that news, the CFO announced his retirement last week adding more fuel to the speculation fire. Not to mention the annual shareholders meeting took place on Monday eliciting investor hopes of noteworthy news.
At times like this, investors need to understand what they own with a clear defined plan for exciting the position. A smart investor either took advantage of the price spike or is now loading up shares as the rumors fade.
Most importantly investors should go back and review the business outlook for OCZ. See our article here discussing how investors should focus on the potential of the stock and ignore the buyout rumors.
The company provided the following highlights for the rest of year:
- OCZ expects net revenue for its second fiscal quarter ending August 31, 2012 (Q2'13), to be in the range of $130 to $140 million.
- OCZ expects net revenue for its fiscal year ending February 28, 2013 (FY'13) to be in the range of $630 to $700 million. This represents a growth rate of approximately 80% at the midpoint; we expect, based on historical trends, revenue to be weighted to the second half of the year, with approximately 60% to 65% of revenue to occur in the second half of the year.
- Non-GAAP gross margins are expected to increase in Q213 and to exit the year in excess of 30%, with typical sequential gross margin increases of 100 to 250 basis points per quarter throughout the fiscal year, subject to changes in product mix as the SSD landscape continues to evolve.
- OCZ expects non-GAAP operating expenses for Q2'13, to be in the range of $38 to $41 million with expenses exiting the year at between $43 and $47 million per quarter, as OCZ continues to invest in its ongoing growth objectives.
What other company provides 80% revenue growth at the midpoint of guidance? If you can find a few stocks with that growth, the guarantee is that those stocks aren't trading at less than 1x expected revenue.
While the buyout rumors have faded, the news flow still suggests the deal with Seagate was on the verge of being finalized. The potential exists for a deal to still be completed yet investors shouldn't view that as a necessity nor even an ideal outcome.
As my previous article attempted to hammer home, the fact that OCZ was supposedly close to a deal and the stock could only muster $7 in regular trading was almost pathetic. Maybe this was a sign that the market knew the speculated valuation wasn't accurate. Seagate might not have been willing to pay such a premium so OCZ walked away. How often does the market see deals with 100% premiums?
As an investor, the preference would be for OCZ to execute on the guidance for 2012 sending the stock higher. At that point, multiple companies would probably big significantly higher than the rumored buyout tag.
One of the biggest if not the biggest concern with OCZ was the depletion of cash during Q2. The outstanding cash balance dropped $50M to end the quarter at only $43M.
While a portion of that reduction went to the operating loss, a total of $42M went to increased Accounts Receivable and Inventory levels plus a reduction in Accounts Payable.
The company was clear that inventory levels would not only drop during Q3, but naturally would begin dropping as a percentage of sales. A major contributing factor was the spending of $14M to increase NAND flash inventories to strategically build inventory for future business levels.
More importantly the company announced a $35M credit line with Wells Capital Finance that could be increased to between $60-100M depending on meeting certain conditions.
The CFO, Art Knapp, announced plans to retire later this year after the company finds a replacement. Considering the guy could be 64 by the time a replacement is properly trained , investors probably shouldn't read too much into this announcement.
Of course, the deal speculation makes this retirement more interesting than normal. Why retire if the company was being bought out? The executive management team typically doesn't join the new company.
As an outsider, one can't accurately derive the true reason for the departure. The real key is that an executive approaching retirement age has decided to leave as the job permits. Art is in no hurry to leave and probably doesn't want to see the company he helped build harmed by leaving the company high and dry.
With two other publicly traded SSD companies, the relative value of OCZ is stunning. Most noticeably is that STEC (STEC) trades for a near identical market cap of $330M while having a CEO under investigation for insider trading and a fraction of the revenue of OCZ.
In fact, analysts expect STEC to report revenue of $182M for 2012 while some expect OCZ to hit over $150M in Q3 alone. These numbers are hardly ones that suggest a similar valuation.
Fusion-io (FIO) reported solid earnings last week and soared nearly 30%. The company now has a market cap of nearly $2.5B. Though having a similar revenue base, Fusion-io trades for over 7x the value of OCZ. The company is more enterprise focused with industry leading margins and solid profits, but the guidance of both companies suggests that OCZ might end next year with industry leading profits.
Clearly the revenue multiple should be higher at Fusion-io at this point, but the discrepancy shouldn't be this extreme. If one can argue that the other two sector stocks are fairly valued, than OCZ probably deserves a current valuation in the middle somewhere. Oddly, the rumored price for the Seagate deal actually appears very solid as $1.1B would be close to the midpoint.
Though investors always theorize buying low and selling high, the reality is that people fret buying low as the stock drops. Everybody wanted to chase OCZ on the buyout rumors seeking quick gains. Now everybody has jumped ship seeing no hope of a near term buyout.
Investors should instead calculate the long term value of the company and use that as a basis for trading the stock. The value for the company could be worth a lot more than the rumored offer price. Hence now might be the time to load up as investors focus solely on a binary event that didn't come to fruition.
Since this stock gets no respect, it provides the ultimate investment opportunity.
Disclosure: I am long OCZ.
Additional disclosure: Please consult your financial advisor before making any investment decisions.