It's good to be STEC
STEC's business model is deceivingly simple:
- Buy flash memory chips from Samsung, Micron Technology
(NYSE: MU) , and Qimonda. - Design SSD storage modules around those chips.
- Turn around and sell the modules to storage system builders including EMC
(NYSE: EMC) , IBM(NYSE: IBM) , and the Oracle(Nasdaq: ORCL) subsidiary formerly known as Sun Microsystems. - Depend on the systems integrators to market the finished product and raise awareness of STEC's technologies.
- Profit!
The system backfires when the A-list partners misjudge their inventory needs and order more STEC drives than they can use for the foreseeable future. That's what happened last spring, driving share prices down by 23% overnight on the announcement that EMC was taking a break from its STEC addiction. Everything is now back to normal as EMC once again stood for 52% of STEC's third-quarter revenue, but the difference this time is that the supporting cast around EMC is much larger and hungrier for product. Total sales were still down 12% year over year but 40% stronger than last quarter.
All things considered, it looks like the rough patch EMC laid out in front of STEC and its shareholders is now in the rear-view mirror. I put an outperform call on STEC in my all-star CAPS portfolio back then and haven't regretted it at all. You can follow my lead in just a couple of clicks. The stock has climbed 37% in just a month but has a long way to go before reaching the two-year highs of more than $40 per share set in September 2009, when the EMC partnership was in the fullest of bloom.