The hard drive industry is suffering from floods in Thailand, where 40% of the global hard drive supply is manufactured. Unit prices skyrocket, system builders from Dell (Nasdaq: DELL) to Hewlett-Packard (NYSE: HPQ) face parts shortages just as we're heading into the crucial holiday shopping season, and the stage is set for the budding solid-state drive technology to save the day. SSD sales should be going through the roof under these circumstances, right?
In theory, they should. Reality is a bit more complicated. System builders must put SSD drives through the paces before slapping them in as hard-drive replacements. Then corporations must qualify the reconfigured system to their own standards before placing orders. High performance and readily available parts may not mean much in the face of high prices per gigabyte and uncertain long-term reliability.
Remember, we're not just talking about a new product line here but a wholesale technology revolution.
That's why SSD specialist STEC (Nasdaq: STEC) is facing "one of the most challenging quarters that we have experienced in the past few years" in the fourth quarter. The company is rolling out a whole new generation of drives, often restarting the clock on that cumbersome qualification process.
Meanwhile, STEC has to deal with hard drive makers offering either "very low aggressive pricing to displace us" or even lower-cost but also lower-performance solutions in order to stay competitive to enterprise customers. "We view these practices by certain competitors as unsustainable over the long term," says CEO Manouch Moshayedi, but that doesn't help much in the short term.
The traditional hard drive market is boiling down to Western Digital (NYSE: WDC) and Seagate International (Nasdaq: STX) thanks to a string of acquisitions, so it's pretty clear that Manouch is talking about these two.
The new products bring "exponentially higher performance, enhanced reliability, and endurance," while also relying on less expensive memory technologies. But like I said, it'll take a while to move these seemingly slam-dunk wins into mass production and serious revenues.
So the just-reported third quarter beat analyst targets with $0.14 of non-GAAP earnings per share on $72.5 million in sales. But the outlook on the next quarter and the start of 2012 was gloomy enough to send shares down by as much as 20.5%.
We have a double-dip buying opportunity in front of us here, after two consecutive quarters of reticent short-term guidance but an intact long-term growth story. I'm taking advantage of this mismatch between long-term business and myopic pricing by putting a thumbs-up rating on STEC in my all-star CAPS portfolio.
Follow along by clicking here. At the very least, you should use our watchlist service to keep a close eye on this mispriced stock. That's another simple one-click action, and you don't even have to take a bullish or bearish stand here.
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