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Should STEC Soar Any Higher?

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Is the market for solid-state drives finally delivering on its promises?

You'd think so after looking at a stock chart for memory-based drive builder STEC (Nasdaq: STEC  ) : The stock has just about doubled in six months. But is the proof truly in the pudding? I'm not so sure.

Fourth-quarter sales fell 11% from the year-ago period, landing at $94 million. That might be OK if STEC were leaving sales on the table to enforce a strict pricing strategy, but gross margin also dwindled from 51% to 45%. In fact, management explained to analysts that lowering prices quarter by quarter is a common practice in the storage industry, and something that STEC's customers insist on doing. The bottom line also compressed from $0.51 of non-GAAP earnings per share to $0.35 per share.

In all fairness, these results beat both analyst expectations and management guidance. But that's more a function of low expectations than terrific business results. STEC isn't really growing, but its margins are shrinking in a long-term kind of way. At the same time, SSD rival SMART Modular Technologies (Nasdaq: SMOD  ) is growing like dollar weeds, and even traditional hard disk makers Seagate Technologies (Nasdaq: STX  ) and Western Digital (NYSE: WDC  ) reported faster growth and stronger margins than STEC did in 2010.

Yet analysts on the earnings call fell all over themselves to congratulate STEC for a great quarter. I feel like I'm missing something. I just ended my "outperform" rating on the stock in CAPS in order to lock in the massive gains of the last six months. I just don't see any signs of further growth, because even these gains seem poorly motivated.

Swing by CAPS to add your own rating right now. The comments box below awaits your reasoning as well.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of Western Digital. 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. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (4) | Recommend This Article (2)

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 14, 2011, at 3:56 PM, man123456 wrote:

    Only told half the story here didn't you? You failed to mention the reason STEC's revenue etc. was so high in Q4 2009 (The EMC overhang, where some of the the revenue for which should have been Q1 2010 ended up being credited to Q4 2009). And how now they beat in Q4 2010 estimates and are projected to have an outstanding Q1 2011. And beyond? If you were to take both Q4 2009 and Q1 2010 the gain per share etc. would be well below what it appears it will be for Q4 2010 and Q1 2011.

  • Report this Comment On February 14, 2011, at 3:58 PM, budandbandit wrote:

    You obviously missed the forest through the trees. You obviously dont follow stec. If you did you would know that last years earnings and revs were based on an inventory overhang contract that was way overzealous. Now they are headed for consistant growth and the margin decrease was to deal with the competition aspect. Their guidance was clearly 60+ mil over a year ago on revs alone, didnt see that in your comments, so next time report ALL of the facts, not a glamorous headline.

  • Report this Comment On February 15, 2011, at 8:58 AM, maxben11 wrote:

    And you failed to say that OCZ Technology is gaining market share.

  • Report this Comment On March 04, 2011, at 4:11 PM, griffintpg wrote:

    Will stec make it back to the place it soared to last year or is stec one one shot wonder?

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