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STEC: Trading Near Cash Value, 140% Upside Potential By 2014

Feb. 11, 2013 5:55 AM ETSTEC, Inc. (STEC)FIO, IBM, MU, NTAP, OCZ, WDC, DELL36 Comments
Ashraf Eassa profile picture
Ashraf Eassa

It's not often that I would bet against a company with a large cash position relative to its market price. In fact, one of my favorite metrics to look at when I begin a screen for underappreciated, deep value plays is the net cash relative to market capitalization. My view is that having a stockpile of cash to cushion several quarters of losses is a critical weapon against bankruptcy for a company that is executing a turnaround gambit. While some turnaround plays dilute their way out of a tight spot, this usually severely damages the holdings of current shareholders.

Let me introduce you to STEC (NASDAQ:STEC), a company with no debt, trading at 80% of net cash on its books and likely well below liquidation value, that is executing a turnaround play in an industry that is experiencing very high secular growth.

STEC's Rise (1990 - 2009)

STEC was founded in March, 1990 by Manouch and Mike Moshayedi as Simple Technology, Inc. A few years later, a third brother, Mark, joined the firm. The company began as a provider of computer memory modules. However, that business very rapidly became commoditized and it became next to impossible to make any significant profit margin by selling memory modules.

The company then made the shrewd move to purchase Cirrus Logic's (CRUS) flash controller business, which gave STEC's business new life as a supplier of flash solutions for consumer electronics. As momentum built, STEC managed to pick up flash card vendor SiliconTech in 1998 and soon thereafter launched a 1GB IDE solid state drive. Keep in mind that flash memory was incredibly expensive back then, so this was a niche, high end product.

After its 2000 IPO, STEC purchased Memtech SSD in 2005 and Gnutech in 2006. In 2007, STEC sold off its consumer flash business and

This article was written by

Ashraf Eassa profile picture
Hi there! I used to write articles here and elsewhere, but no longer do so. I have provided my Twitter handle and LinkedIn profile below.

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Comments (36)

Robert Vasquez profile picture
any thoughts on the dissident board of directors battle? Sounds like its unstable.
Rhinoish profile picture
Great article Ash. I'm looking to make a move into one of the enterprise ssd players, haven't decided who yet because I haven't had a chance to evaluate the actual products each company is selling (stupid day job). You laid out your case based on the fundamentals and the upside, curious what you know about the tech. Anything on anandtech, benchmarks out there somewhere, maybe something interesting at open compute summit last month?
Ashraf Eassa profile picture

My thoughts are that the company has talented technical staff, but hadn't focused them correctly until recently. They now have caching/virtualization software, PCIe drives that seem to be up to spec, SATA/SAS drives that are competitive, and in general a much stronger lineup than before.

Make no mistake: I like this stock because its valuation makes it a spec play that has good risk/reward :)

Glad you enjoyed the article :)
Aricool profile picture
while not a pure play, SNDK is the only SSD related play I've made very good $ on so far.
scinvestor profile picture
"the company could choose to shut everything down, return the cash to shareholders, sell its patents, buildings, and such and then shareholders at today's price would end up ahead"

Hard to fathom that the CEO would walk from $530k cash compensation, plus his (up to) 200% cash bonus, plus stock options, plus perks. (His brother doesn't do too badly either)
StreetEconomist profile picture
Keep up the outstanding work. I learn something every time I read one of your pieces.
Management is everything, and I have zero confidence in these guys, sad to say. Not for my investment money.
David/David profile picture
Is their R&D expensed or capitalized? If the former, it's going to be a big hit to the bottom line short term. Of course, with this company right now, short term is all that matters. If it's capitalized, there's the question of where the money to hire the sales force and support the R&D effort is going to come from. Either way, I see lots of downside and not nearly as much upside as projected. Just because they are hiring a sales force doesn't mean they can generate sales immediately. It takes time to develop the relationships leading to sales, and 200 persons have many more established relationships than 8. Of course, if it's a commodity business, it's a different story--low cost producer wins. STEC doesn't sound like the low-cost producer. Am I missing something here?
South Gent profile picture
Ashraf: I may have missed it in your article, but it looks to me like some of STEC's cash is about to be used to fund a class action settlement, assuming it is finalized:

Page 8 10-Q for the Q/E 9/30/12

"As previously disclosed in the Company’s Form 10-Q filed on August 7, 2012, the Company had recorded as of June 30, 2012 an estimated settlement accrual of $35 million and an insurance claim receivable of $20 million, resulting in a net charge of $15 million recorded as a component of other expense. On October 18, 2012, the Company’s insurance carriers agreed to contribute $562,500 of the additional settlement cost of $750,000. As a result, the Company has recorded an additional settlement accrual of $750,000 and an additional insurance claim receivable of $562,500, resulting in a net charge of $187,500 recorded as a component of other expense for the quarterly period ended September 30, 2012. The Settlement Agreement remains subject to court approval and certain other conditions, including notice to class members and an opportunity for class members to object to or opt out of the settlement. At this time, there can be no assurance that the conditions to effect the settlement will be met, that the Settlement Agreement will receive the required court and other approvals or that the settlement will become final."


I do not see any reference to the $65.8M in debt mentioned by ATX above in the 10-Q. I do not see any long term debt on the balance sheet (page 1). I do not see anything in subsequent filings to show the incurrence of any long term debt.

There is a large increase in the balance sheet item for current liabilities, consisting of "accrued and other liabilities" ($53.330M from $14.309M as of 12/31/11). That $53+M amount includes $35.75M in the "accrued settlement" and $3.118M in "accrued legal" (page 8).

It does look a proxy battle is shaping up between STEC and twp hedge funds: Balch Hill and Potomac.

I recall that Balch filed a 13D in connection with PLXT shortly before that firm announced an agreement to be acquired.

PLXT was one of Lottery Tickets which I sold after the merger announcement.

Item # 5 " Sold 70 PLXT at $6.66"

Link to recent STEC 13 D filing by Balch Hill:


I have no position in STEC. At most, I would buy it under my Lottery Ticket strategy:

Lottery Ticket Strategy:
David Alton Clark profile picture
"The reason this story is so compelling is that the company could choose to shut everything down, return the cash to shareholders, sell its patents, buildings, and such and then shareholders at today's price would end up ahead."

Thats not how it goes Ash. Name one company in history that has done that. I would be interested to hear about it. They usually declare chapter 11 bankruptcy reorg and the shareholders get nada. Then they get bought out for pennies on the dollar by someone.

" I believe that there's a lot of growth to be had in enterprise storage solutions, especially as in this space, the primary differentiators are in the software."

The sector is comoditized and the competition is steep. STEC is losing market share while revenues are down, expenses up and profits non existent. Their only hope is a buy out. But most have already passed. DAC
Nice article, well researched and documented.

STEC has terrific technology......not so good management, sales and marketing.

They have had their own proprietary controller and firmware for at least 4 years. Initially FPGA based, migrated to ASIC (a.k.a SoC) in 2011. They also pioneered best of breed adaptive DSP flash technology, vs. a solution utilizing increased ECC to leverage more endurance), as well as delivering EnhanceIO SSD Cache Software for Linux and Windows environments.

As formentioned, STEC has never been good at Sales and Marketing, instead relied solely on Enterprise OEM partners (e.g. IBM, HP, EMC, Cisco, Dell, NepApps, Fujitsu, Hitachi etc.).

However, in last reporting period, they said they now shipping to a large (10%) direct Enterprise account.

Last month, Balch Hill Capital, which holds 9 percent of STEC,urged STEC to consider strategic alternatives. Craig-Hallum Capital analyst Richard Shannon suggested that.Seagate Technology, Western Digital Corp, Samsung Electronic Co, Micron Technology, Toshiba Corp and SanDisk Corp could be the potential buyers

As you point out, when you back out the $186M cash from current market cap it's the the most compelling value available.

Very likely to happen.
Ashraf Eassa profile picture
Thank you, serendipity.
Aricool profile picture
"STEC has terrific technology"
how so? FIO claims they can get better performance than STEC with cheaper, retail grade FLASH. Also, FIO claims to have better pricing and long-term contracts on FLASH supply. That issue has hurt OCZ really bad lately. What about STEC?
12 Feb. 2013
Sorry, but virtually every company who could buy STEC has passed on STEC. Seagate has passed three times. They are now with Virident and DenseBytes and I think their Pulsar SSD line was with Micron or someone. I don't remember. WDC bough Hitachi HDD which came with the HTC SSD group. The HTC SSD groups works with Intel. Samsung used to supply NAND to STEC (STEC has switched over quite a bit to Toshiba NAND). Samsung is also a competitor. SanDisk bought Pliant so they have no need for STEC.

The brothers laughed at Balch Hill because BH was such a joke. BH actually thought that some other shareholders were going to join them and pressure the brothers. Well, that didn't happen. So BH is left with 9% and no leverage (and apparently no guts to go forward). The brothers are not going to sell this company anytime soon. I can assure you.
Matt Little profile picture
I am always looking for good risk/reward situations like this one to consider. Thanks.
winicks profile picture
After close on Wednesday NetApp (NTAP) should provide insight on the state of information technology, and data storage, spending when it releases its fiscal Q3 earnings. I will listen to that conference call because they have recently tested STEC products. STEC went down a little after EMC earnings so if NTAP stock does well that may balance EMC info.
winicks profile picture
The entire story will change on 2-28-13 when they release #'s. They meet last time but gave a poor forcast which caused stock to be over sold but they may be able to beat which will push stock higher. Not sure why stories are written prior to earnings. Poor forcast then insiders buy lots of shares stock rises, then earnings are good but always the key is do they beat but if they do future.
cyrano13 profile picture
STEC still has over 15% short interest for a reason. The moment play is long past and technology leadership once lost is seldom regained.
Halukcan profile picture
This company has been in business for more than 20 years, They have the technology, I dont think there is a big difference between FIO and STEC, what sets them apart is FIO does marketing much more better, its pure hype.

Mark mosyahedi mentioned that they had 8 sales people while FIO had 200, now they are increasing their sales people count, look at the vacancies page of STEC, theyre hiring bunch of sales and marketing guys, they know their weakness.
12 Feb. 2013
I did not read this article, but I can not agree with the title. STEC trading near cash value? absolutely not, btw, I have no interest in this company, I don't even know what they do, I'm just using simple math.

These are information provided by Macroaxis, although they are not completely current, they are a good estimation:

Market Cap: 239.24M
Cash: 186.2 M - Debt: 64.58M = Total Cash: 121.62
Current Valuation 53.04 M Divided by: Shares Outstanding 46.73 M
Shares Outstanding 46.73 M
Number of Shares Shorted 7.96 M

Short interest: 17%, that's pretty high, this means that many people thinks it's gonna crash, normally when a stock is really cheap at rock bottom price, the short interest is less than 5%, which means most people are scared to short that stock, for example ZNGA has a short interest of 2%, meaning nobody got the guts to short ZNGA at such low level, but there's 17% short interest on STEC meaning alot of people thinks it's gonna tank. I have no idea who STEC is, but according to my simple math calculation, you don't wanna put your money in on a stock that has such high amount of short interest.
Halukcan profile picture
Netflix had over 30% short before that massive squeeze which led to the stock running up 80% in a week lol
Tony Pow profile picture
Most likely it is a short squeeze. Recently I bought DECK with about 50% short and then it gains about 50% in about 2 months - from my memory.
meridian6 profile picture
Too late for STEC. The problem is with the management. Their reputation in the industry is bad. They're in death mode with employee cuts. PCIe is a commodity now - everyone is making it. Why would a customer buy from a company they think will go out of business?

Margins are bad as OEMS cut prices - STEC can take it or leave it since they're so many suppliers out there. Bad position to be in.

I don't think they have any tech that would make them a buyout target.
Tony Pow profile picture
It is up by 3.5% this morning. Does this article influence the price?

I'm in.

The company is losing money, bottom rating from analysts, about 15% short... It does not look good, but it seems a good bet for turnaround.

The huge cash could allow the company to come back in n years (= Avail. Cash / Burn rate per year). It seems it has a good chance to come back.

What is the chance of being acquired by other company?

Thanks for the article.

I had the company's external hard disk a long while ago. I dropped and it never recovered and I hope the stock price will.
Ashraf, interesting article!

Any management changes anticipated?
Ashraf Eassa profile picture
None that I can think of...although I wouldn't be surprised.

Glad you found the article interesting!
Akram's Razor profile picture
upside...not necessarily big....65mln ev is maybe half what someone like seagate would pay...but their position is real weak so tough call
PSalerno profile picture
I never saw a company shutting down the business and returning cash to shareholder. But I see the point, if the company will stop burning cash and return to profit, there is big upside.
Aricool profile picture
years ago I had a nano-cap (digital newspaper printing plates) stock self dissolve and return cash, stating the same reason the author says. It must be pretty rare though. likely needs high insider ownership for them to seriously consider it, and their technology would have to be darn near obsolete to not get any buyout above tangible book value.
PSalerno profile picture
Yes, exceptional conditions can make possible this exceptional outcome.
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