The prospect of brewing competition for Santa Ana’s STEC Inc. isn’t as daunting as it seems, according to some on Wall Street.
Highflying STEC, which has seen its shares soar more than 500% since the start of the year, took a hit earlier this month after a slew of product announcements from companies seen as potential rivals.
Shares are off more than 20% in the past month on a recent market value of about $1.5 billion.
“The stock has been up a lot, so it was a bit of a powder keg looking for any reason to go down,” said Richard Kugele, an analyst at Needham & Co. in Boston. “All of this is sentiment driven.”
A flurry of announcements from Irvine’s Toshiba America Elec-tronic Components Inc., a unit of Japan’s Toshiba Corp., Northern Califor-nia’s Smart Modular Technologies Inc. and Milpitas-based Pliant Technology Inc. signaled their entry into what has been exclusive to STEC—so-called “enterprise grade” solid state drives for corporate and industrial uses.
Solid state drives, which have no moving parts, are being built into storage networks in place of traditional disk drives because they use less power and are faster at some tasks.
STEC has had a big leg up on others in the market, including disk drive makers Hitachi Ltd. of Japan, Lake Forest’s Western Digital Corp. and Scotts Valley-based Seagate Technology LLC.
The three rival disk drive makers are expected to launch solid state drives next year.
Some say the announcements are overblown and don’t represent an immediate threat to STEC.
“There have been a lot of product announcements, some of which compete and some that don’t,” Kugele said. “But most of them don’t.”
STEC Responds
Last week, STEC responded to concerns with the publication of a white paper that attempted to downplay the competitive threat.
“Not all solid state drives that are being directed at the high-end enterprise market are equally suited for these applications,” the company said. “While consumer grade solid state drives may be available from multiple sources and may be offered at seemingly attractive price points, these solid state drives are not capable of or well-suited for deployment in a mission critical data center.”
Capstone Investments LLC analyst Jeff Schreiner said the recent press releases “are likely misunderstood by investors.”
“We don’t believe that any of these competitors likely offer significant competitive concerns during the next two quarters and selling shares based on initial press releases likely discounts (STEC’s) potential strong third-quarter results,” he said in a note.
Pliant Technology, one of the few that is seen as competing with STEC, is sort of the dark horse in the business.
It got started last year and has raised about $23 million in venture funding to date.
Analyst Kugele said he doesn’t think Pliant poses much of a threat to STEC.
“Pliant announced some of their drives are in qualification today with a number of top tier (data storage computer makers), but the company is still pre-revenue and only has about 30 people,” he said. “It’s going to take some time before they will be able to really ship in volume.”
There is one looming concern for STEC.
Its top customer, Massachusetts-based EMC Corp., is likely to ink a deal with another supplier of solid state drives at some point.
“EMC for a long time has always been talking about wanting a second source,” Kugele said.
For STEC, that means “the overall pricing and potentially the margin profile will go down with increased competition,” he said. “That’s inevitable.”
Still No. 1
Even with newcomers, STEC is likely to hold its spot at the top of the heap for the near term, according to analyst Schreiner.
“While EMC and others would certainly like a second or third source for solid stated drives, STEC still maintains its market leading position at this time,” he said.
While STEC inevitably will lose its monopoly, both analysts see STEC as a big player in the market when it matures.
“For this market to actually develop it can’t be supplied by just one vendor,” Kugele said. “STEC happens to have a first-mover advantage, which earns it a seat at the table when it all settles out.”
Analysts are bullish on the company’s shares for the rest of this year and into early 2010 on anticipated strong quarterly results.
For the current quarter, STEC is projecting a profit of $22 million to $23 million on sales of $95 million to $97 million.
That would be roughly more than triple the profits and 50% sales growth from the third quarter of 2008.
Analysts, on average, are looking for profits of $23 million on sales of $97 million.
“We continue to view this sector as only in its infancy and see significant upside remaining for STEC in particular,” Kugele said in a research note.
