OCZ's Pain Is Micron's Gain

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Call it a collateral benefit: Solid-state drive specialist OCZ Technology (Nasdaq: OCZ  ) just reshaped a neighboring industry.

The company just pre-announced its second-quarter revenue. Landing somewhere between $110 million and $120 million, the top-line haul will come in about 15% below management's guidance. Analysts toed the management line in every way, so investors are running for the exits today: OCZ plunged as far as 30% overnight.

But that's only half the story. You see, OCZ insists that demand for its ultra-fast storage products remains very high. The problem lies in tight supplies of the NAND flash memory chips that make OCZ's drives work.

"During the month of August we experienced a significant shortage on certain NAND flash components, based on industrywide tightening of supply," said CEO Ryan Petersen. Hence, OCZ is left with large backorders due to undersupply of crucial memory chips.

What it all means
That's bad news for OCZ, which is left up the creek without a component paddle. The company may leave money on the table if it can't fill existing orders in a timely manner, and this incident could also inspire potential customers to look elsewhere the next time they need large shipments of SSD devices.

But on the flip side, the tight chip supply is totally awesome for the memory chip makers. That's why shares of Micron Technology (Nasdaq: MU  ) and SanDisk (Nasdaq: SNDK  ) jumped more than 8% on OCZ's news. The industry has been plagued by oversupply in recent months. Leading chip makers have been slashing their manufacturing output in an effort to stop unit prices from falling through the floor.

In its latest earnings call, Micron stood shoulder-to-shoulder with its chip-making rivals on that battle line: "We're with our industry peers right now in that we're not really excited to add a lot of capacity either," said Glen Hawk, president of Micron's NAND division. "And [that's] going to remain so for some time but as this long-term demand in these new applications kick in, you bet things are going to tighten up once again. And I think that's going to lead to a different dynamic that will favor the NAND suppliers who are manufacturing their own SSDs."

So now that OCZ sent up a signal flare that shows strong demand meeting tight supplies, NAND prices should stabilize or maybe even climb for a while. OCZ doesn't make its own memory chips, but both SanDisk and Micron sell chips, as well as SSD drives.

Will OCZ recover from this miss?
OCZ's future will depend on the company locking up some long-term supply contracts. Needham analyst Richard Kugele downgraded that stock to a hold, explaining that "The perception of inconsistent execution on guidance and supply chain management continues to mar what otherwise would be a major success story, in our view."

I couldn't have said it better myself. That inconsistency is a large part of why I own Micron in my real-world portfolio but only have a bullish CAPScall on OCZ. And even that stamp of approval will get licked soon unless OCZ can tighten up its inconsistent operations.

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Fool contributor Anders Bylund owns shares in Micron but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. The Motley Fool has a disclosure policy.

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  • Report this Comment On September 07, 2012, at 1:20 PM, garifolle wrote:

    The excitement with Micron (MU) might have been premature.

    Their problems with Elpida Bondholders are not over yet, and Elpida will be a heavy burden if the economy does not improve.

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