The wind has been let out of STEC Inc.’s sails.
Shares of the Santa Ana-based maker of flash memory drives for corporate and industrial uses have lost about two-thirds of their value in the past two months.
The slide started a few weeks ago when STEC gave a conservative outlook for the balance of the year and warned that sales to its top customer may slow.
Spooked investors spurred a big sell-off, paring STEC’s gains since the start of the year to around 185%. That’s down from gains as sky-high as 800% for the year in mid-September.
Adding insult to injury, the company was slapped with a handful of shareholder lawsuits last week as lawyers pounced on the stock’s slide.
What sent shares tumbling was a vague warning from STEC management about an inventory issue with the company’s biggest customer, storage networking kingpin EMC Corp. of Hopkinton, Mass.
Chief Executive Manouch Moshayedi disclosed in a call with analysts recently that EMC likely has too many of STEC’s drives on hand and could slow its ordering as it carries over some of its 2009 stock into 2010.
“Effectively STEC is joined at the hip with any EMC decision,” an analyst said on investor Web site Seekingalpha.com.
Company watchers say EMC makes up roughly 90% of sales of STEC’s ZeusIOPS drives, which are used in storage networks by banks, retailers, governments and others.
The products are known as solid state drives because they have no moving parts. They’re seen as potentially replacing traditional disk drives for their increased data transfer speed, quick startup, durability and energy savings.
Fourth Quarter
Even with growth in solid state drives, STEC recently gave fourth-quarter guidance below what analysts were expecting on average.
STEC expects adjusted profits of $25 million to $26 million, which at the low end fell shy of the $26 million analysts had been expecting on average.
The company forecast sales of $101 million to $103 million, below the $106 million Wall Street had been expecting.
Analysts since have revised their estimates downward. On average, they are expecting profits of $26 million on sales of $102 million.
The cautious forecast broke with a pattern of bullish outlooks from the company, which had a recent market value of around $670 million.
STEC’s third-quarter results were nothing to sneeze at.
The company reported sales of $98 million, up 54% from a year earlier. Excluding one-time charges, it posted $25 million in profits, up from $1 million in profits a year earlier.
EMC largely is seen as STEC’s golden ticket.
STEC wasn’t really on the radar until EMC qualified its ZeusIOPS drives in 2008. Big orders from EMC, an early adopter of solid state drives, propelled STEC on to a fast-growth track.
Some on Wall Street say the company—in industry parlance—may have hit a “near-term wall.” That means STEC’s spectacular runup likely has hit a plateau for now.
STEC has had the market for solid state business drives to itself for much of the past year, but now it faces the prospect of competition.
Intel Corp., Kingston Technology Co. as well as disk drive makers Seagate Technology LLC and Western Digital Corp. have all come out with solid state drives or have plans to.
Others say the lackluster news is just a hiccup in what likely will be a long growth trajectory for STEC, which has an early market lead on the competition.
Needham & Co. analyst Richard Kugele called the market reaction to the issue with EMC an “overreaction” that amounts to a short-term drag on the stock.
“We remain positive about enterprise solid state drive opportunity in 2010 but recognize that the EMC inventory overhang clouds the story temporarily,” Kugele said in a research note.
This pattern isn’t atypical for new technology.
“Often with a new technology introduction, initial adopters fuel demand, creating a strong growth trajectory,” said Jeff Schreiner, an analyst at Capstone Investments LLC. “Following initial adoption, growth can typically plateau. We believe STEC’s prior growth trajectory price into shares has likely been lowered, potentially limiting the forward price-to-earnings multiple.”
Pick Up Slack
Now it’s up to STEC’s other customers, some of which are still qualifying its drives, to pick up the slack where EMC falls short. Customers include Dell Inc., IBM Corp. and Sun Microsystems Inc.
“Other customers will likely need to see broader adoption of solid state drive technology in order for STEC to see growth resurgence,” Schreiner said. “Further growth following a plateau is usually followed by broader adoption of a new technology, eventually reaching the mainstream.”
Schreiner cut his fourth-quarter sales estimates for STEC to an expected $102 million, down from a previous estimate of $108 million. He maintained a “hold” rating on the stock.
On average, analysts are looking for STEC to see 2010 profits of about $96 million (up 19% from 2009 estimates) on sales of $424 million (up 21%).
