OCZ Technology: Strengths, Weaknesses, Opportunities, Threats

A few days back I had written about OCZ Technology's (Nasdaq: OCZ  ) strong performance in the third quarter and told you why the stock looks like a long term buy. Now, a SWOT analysis will give you a clear picture of some important things you need to know about the company before you make an investment. 

Strengths

  • Creating barriers to entry: OCZ Technology is looking to keep competition under control by creating barriers to entry in a fast growing SSD market. As a result, the company has been expanding its product portfolio continuously, which is helping it stay ahead of its peers.
  • Strong R&D: OCZ is multiplying its engineering team rapidly as it looks to maintain the product development advantage which it currently has. To further supplement its R&D moves, OCZ made a few strategic acquisitions such as those of Solid Data Systems, Indilinx, and SANRAD, and these will add fuel to the company's product portfolio.
  • Strategic partnerships: The company's chips have got a thumbs up from Intel for use in the much anticipated Ultrabooks and have already found their way inside the Ultrabook variant of LG Electronics.

Weaknesses

  • Mind the cash: Although the company has seen solid growth in revenue, it has failed to generate positive cash from operations in the last five years, and the figure goes deeper into the red every quarter. Even though it has a credit facility with Wells Fargo, I believe positive cash will really matter if OCZ wishes to continue its growth story in the long run.
  • Inventory overflow: OCZ's inventory has grown an astounding 372% from the year-ago period. This is certainly a matter of concern as revenues grew only 94% in comparison with the mammoth inventory jump.
  • Margin woes: OCZ sports a much lower gross margin of 22% as compared with its primary rival STEC, which has a margin of almost 50%. So, OCZ needs to pull up its socks by introducing stringent cost control measures and streamlining inventories to attain industry standards.

Opportunities

  • SSD market shining: The market for SSDs is growing tremendously. Analysts expect 51% annual growth in shipments over the next four years as mobile computing devices, in which SSDs are used, are finding greater acceptance among consumers.
  • Growth in cloud computing: SSDs provide the most cost-effective solution to data centers which form the base for a booming cloud computing platform. This relatively new arena in computing is expected to grow at a supersonic rate of 39% annually over the next four years, giving OCZ more room for growth.

Threats

  • Cost disadvantage vs. hard disk drives (HDD): Even though SSDs are catching on, they are still a costlier storage option as compared with HDDs. Cost of storage on SSDs is significantly more than HDDs which are still in high demand in emerging markets due to high PC sales. The storage cost needs to come down dramatically if SSDs are to find acceptability over a broader horizon.
  • Thin hard-disk drives: One serious threat to the SSD growth story is Seagate's thin hard drive. These thin HDDs have the capability of replacing SSDs in notebooks and tablets, and as such could mount a grave challenge in future.  

The Foolish takeaway
On the whole, things are on the brighter side for OCZ Technology. There are a few uncertain areas associated with it but you will find them in almost every stock you look at. Also, with its cutting edge technology and bright business prospects, I believe that OCZ is a stock capable of performing well in the long run.

And in case you wish to keep track of the company's progress, you can add it to your free watchlist.

Fool contributor Harsh Chauhan does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 03, 2012, at 12:25 PM, loudcld wrote:

    All three weaknesses are getting addressed. They have filed for a secondary offering. I am not too happy about the share dilution but the CEO has said in the past that he would only do this if there was a large opportunity. The increase in inventory is needed to stock up on the wafers which improves the margins and yield (larger quantity purchase can lead to better price and quality of raw material). Also Indilinx acquisition was in large part to increase margins.

    I use an SSD in my notebook and will never go back to HDD. HDD is a big bottleneck when you launch applications. HDD shortages will only increase the adaption rate. I was very happy to hear Seagate CEO’s plan to auction HDDs. I don’t own Seagate but it makes sense to make more money in the short run. The more successful the auction is, the faster the conversion from HDD to SSD will be. I love it the way it is playing out. BTW I am long OCZ if you couldn’t from the post.

  • Report this Comment On February 03, 2012, at 2:48 PM, hchen42 wrote:

    Isn't margin below standard often a reason why it becomes a take over target? I wouldn't mind if OCZ is taken over. :) Yes, I am long on OCZ. I am definitely concern with cash flow - usually high growth rate and bad cash flow, to me at least, often mean bad accounting practice or bad spending habits. However, given the ridiculous growth rate on SSD, forget it. Also, clouds are being built, most people I know don't require anything over 120 GB of drive. SSD 120 GB is around 1GB/$1 now. It was roughtly 1GB/$2 this time last year. So we could expect the cost to drop further, hence the move from hdd to ssd would continue to accelerate.

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