I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up in our series is STEC Inc. (Nasdaq: STEC), a maker of solid-state storage devices used in corporate networks. If you're unfamiliar, solid-state storage is different from optical or magnetic storage in that it is based on memory. It's also very fast.

But the breakthroughs come with a cost. At present, solid-state storage is expensive and typically found in higher-end devices such as Apple's iPad and its premium Macs.

Foolish facts

Metric

STEC Inc.

CAPS stars (5 max)

***

Total ratings

780

Percent bulls

92.4%

Percent bears

7.6%

Bullish pitches

115 out of 126

Highest rated peers

Super Micro Computer, Immersion, EMC Corp. (NYSE: EMC)

Data current as of Sept. 2.

Many Fools don't know what to think about STEC when compared to well-funded competitors, including Intel (Nasdaq: INTC) and SanDisk (Nasdaq: SNDK).

"The expectations built into the current stock price are not achievable, unless both 1) the SSD market takes off, and 2) STEC achieves domination in the market, i.e. 40%+ market share. Either one of those may happen but unlikely both will," Foolish investor flashfinancials wrote recently.

Fair enough, yet I'm not convinced STEC is overvalued. Shares of STEC entered the day trading for just over 10 times next year's estimated earnings, and Wall Street has been underestimating the company's earnings power recently.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

82.8%

1,261.9%

(34.8%)

Revenue growth

12.6%

55.7%

20.6%

Gross margin

46.7%

47.7%

31.3%

Receivables growth

(19.5%)

80.1%

26.9%

Shares outstanding

50.8 million

50.3 million

48.4 million

Source: Capital IQ, a division of Standard & Poor's.

Feel cross-eyed looking this table? I don't blame you. Conflicting messages abound:

  • Revenue is up, up again, and then WAY down. What gives? Choppy demand isn't a great sign, though to be fair, the storage business is tied to technology upgrade cycles, and cyclical businesses always produce lumpy results.
  • On the plus side, it's nice to see STEC produce healthy gross margin. The company isn't resorting to steep price cuts to juice sales.
  • The most confusing piece of this puzzle is normalized net income growth. From the numbers, it seems STEC has done an excellent job collecting payments due (i.e., lower receivables) and exerting pricing power (i.e., good, stable margins).

Competitor checkup

Competitor

Normalized Net Income Growth (3 years)

Intel

24%

SanDisk

39.4%

Seagate Technology (NYSE: STX)

34.2%

STEC

26.5%

Western Digital (NYSE: WDC)

51.7%

Sources: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 2.

Here, too, it's tough to get a read on STEC. It's certainly not the fastest grower, but I hesitate to give Seagate and Western Digital too much credit in evaluating STEC because they're better known for making PC hard drives.

Grade = sustainable
STEC's story is at times unclear and certainly unfinished, but I like the trends. Gross margin is holding steady and net income is expanding mightily. High revenue growth is going to have to return at some point, but with PC manufacturers and network operators showing a greater appetite for SSD, I believe that day is coming.

Now it's your turn to weigh in. Do you like STEC at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email or replying to him on Twitter.

For further Foolishness featuring STEC:

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Apple is a Motley Fool Stock Advisor selection. Intel is a Motley Fool Inside Value pick. Motley Fool Options has recommended subscribers buy Intel calls. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He had stock and options positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of and has written puts in Intel. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.