As chronicled a few weeks back, OCZ Technology Group Inc (OCZ) is one of the most drama-ridden stocks in the market. The stock has been whipped around by numerous buyout rumors and a wild pattern of high growth followed by disappointing earnings. After the close on Wednesday, the company again reported disappointing preliminary revenue numbers, even as demand soars.
That was the bad news and likely what the market will focus on, with the stock trading down 20% in the after-markets. The good news that the market will ignore is that the guidance miss is due to the lack of NAND supply from third party suppliers. Bookings again exceeded expectations and that should ultimately guide the stock price.
The shortage of NAND appears related to Apple (AAPL) buying up all available supplies for either the iPad-Mini or the iPhone5. This caused suppliers to cut capacity for the 2xnm MLC NAND used in the Vertex and Agility line of products.
Any company with a supply issue rather than a demand issue should be bought on dips. Supply issues can be resolved - unlike the lack of demand. At times like this, investors need to understand what they own, with a clear defined plan for the position. A smart investor is prepared for the wild swings of this stock.
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. This applies even more considering this new issue.
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 million 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.
This company provides huge growth whether or not it hits the 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.
For any investors willing to calculate the numbers, the company clearly highlighted during the conference call that bookings easily exceeded the $140M guidance and the level for Q1. Combine these bookings with the $27M backlog from Q1 and the company easily had the potential for over $170M in revenue for Q2.
The CEO actually mentioned that the backlog was "an insurmountable amount" and "more than sufficient demand that investors won't even see as credible", suggesting that the bookings totals were significantly higher than $140M.
Another key to understand is that the company had the potential for reporting revenue totals in excess of record numbers by 50%. Investors should consider this in understanding the issue.
The company has only recently reached these large bookings level, hence the issue with previously obtaining a NAND deal. Vendors just weren't interested in talking to OCZ, considering the previous purchase level was too low for discussions.
Barefoot 3 Controller
The initial samplings of the Barefoot 3 controller have exceeded expectations. The launch is expected within weeks and, more importantly, it supports alternative NAND flash technologies, allowing the company to potentially overcome the NAND supply issues.
Whether this new controller can solve the supply issue as the CEO suggested is a question for a tech expert. The key though is that the controller appears ready for launch and provides OCZ with a significant advantage over competitors.
Several rumors continue to persist surrounding a buyout of OCZ by either Western Digital (WDC) or Seagate Technology (STX). This NAND supply issue could easily be key to any negotiations regarding a deal. Both potential acquirers would've been keenly aware of an upcoming supply issue that could dramatically impact the stock price of OCZ.
This issue could easily have lead to a disagreement in price for a deal that appeared close to finalized a few weeks back. The market may never know, but the CEO of OCZ clearly didn't deny the rumors on the call suggesting that a level of discussion had occurred.
Fortunately for OCZ shareholders, the news on the bookings further solidifies the need of a much higher valuation for the stock that these acquirers might not share the same enthusiasm.
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 previous buyout rumors seeking quick gains. Now everybody has jumped ship, seeing no hope of a near term buyout and disappointing results.
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, considering the surging demand. Hence now might be the time to load up, as investors focus solely on a binary event that didn't come to fruition and supply issues.
Since this stock gets no respect, it provides the ultimate investment opportunity. Investors that believe management, should load up on the stock: remember that management would be committing outright fraud to report huge bookings and overwhelming demand if it weren't true. Consider that before selling the stock at these levels.
Disclaimer: Please consult your financial advisor before making any investment decisions.