Is This the End of the Road for Quantum?

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Shares of Quantum (NYSE: QTM  ) hit a 52-week low on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
The phrase "cyclical business" has far more meaning if you're a Quantum shareholder than with possibly any other stock or sector. Quantum, which provides physical, virtual, and cloud data encryption and storage solutions, has been crushed on the heels of tepid technology spending from both enterprises and consumers, as well as cautious spending in Europe related to the ongoing credit crisis.

In its second-quarter earnings report, released last week, Quantum pointed to record disk system and software revenue, as well as 5% sequential quarter revenue growth. However, the fact remains that Quantum's total sales fell 11%, and expenses were only slightly reduced, as it reported a $0.05 loss per share, reversing a year-ago profit of $0.01.

In addition, Quantum's cash situation has been a nuisance. With only $29 million in cash on the book and $184.5 million in debt, Friday's announcement of a convertible debt offering totaling $60 million that sent the stock screaming lower shouldn't come as a surprise.

The final nail in the coffin has been dealing with a steady dose of bigger competitors and poor results from even many of them. Hewlett-Packard (NYSE: HPQ  ) is laying off 27,000 people and struggling to redefine its identity while IBM (NYSE: IBM  ) widely missed revenue estimates in its recently reported quarter, citing enterprise spending weakness as the culprit. For NetApp (Nasdaq: NTAP  ) , it's under margin pressure as it reduces its pricing to remain competitive and faces further market share losses to EMC (NYSE: EMC  ) . And as for EMC, the purported king of storage and cloud-based solutions, even it noted a slowdown in storage and networking spending in its latest quarter. Nobody can win for trying in this sector at the moment.

What could change Quantum's fortune?
The key factor needed to change Quantum's luck is a rebound in enterprise spending. Consumers aren't enough of a factor to really boost Quantum's bottom line; it'll need domestic enterprises and those in Europe to open up their wallets and spend. A boost could actually be right around the corner for Quantum as the upcoming U.S. presidential elections have caused many domestic enterprises to hold off on making big purchases. Once that situation becomes clearer, spending may pick up.

Quantum also needs to be prudent with its spending. Although it's not losing money hand over fist, it could do more from an operational perspective to reduce its expenses, boost its margins and operating efficiencies, and conserve cash while the industry is in a downturn.

Long-term trends are also on Quantum's side. As business transfer data from in-house PCs and servers to big data centers, Quantum's encryption and storage products (along with its bigger peers) are going to play a larger role. This move is happening whether we like it or not, but a weaker global economy has slowed that transition.

What's next
Now for the $64,000 question: What's next for Quantum? That question depends on the health of the global economy, Quantum's ability to innovate and bring new products to the table, and whether it can reduce its cash burn to a point that satisfies investors.

Our very own CAPS community gives the company a three-star rating (out of five), with 86.2% of members expecting it to outperform. I've yet to personally make a CAPScall on Quantum and while I'm leaning toward supporting its business plan on paper, I'm going to pass on making a call today.

While timing the market is basically impossible, I don't see now as the right time to buy into Quantum. The storage and encryption sector is going through an industrywide downturn that only recently began and could continue for at least a few more quarters. Europe and the U.S. presidential elections represent two reasons enterprises are unlikely to spend in large quantities right now and could mean further downside for Quantum. With the company so precariously near $1, it's going to be difficult for it to escape the "penny stock" moniker. For now, it will be an addition to my Watchlist, and I may consider adding it with an outperform call when I begin to see stabilization from its larger peers, EMC, IBM, and NetApp.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of IBM and EMC. Motley Fool newsletter services have recommended creating a synthetic long position in IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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