When it comes to turnaround stories on the brink of insolvency, speculators and investors usually either lose their shirts or strike gold. There's rarely a middle ground.
When a company ends up priced as though it were headed for the corporate morgue, it is usually for very good reason. Often, the company is burning though cash at unsustainable rates, all too often due to the company's products simply having an unfavorable cost structure to compete in the market. OCZ Technology Group (UNKNOWN:OCZ.DL), a pure-play vendor of solid-state drives, is such a name.
Management is trying to right a wronged ship
The drama behind OCZ is fairly well known by now -- the prior management team screwed up so badly that it had to restate multiple years of financials. The company is burning through its cash incredibly quickly, and despite frantic attempts to monetize inventory -- even at negative gross margins -- as well as some loans on incredibly unfavorable terms, the company is quickly running out of options.
The problems are structural
The unfortunate thing about all of this is that OCZ's high-end consumer drives are actually quite good. The company has exited the low end and mainstream areas of solid-state drives, as this segment is all about cost. The firm's in-house Barefoot 3 controller is able to perform quite well even against solutions from powerhouse Samsung (NASDAQOTH:SSNLF) -- quite a technical achievement.
Unfortunately, OCZ's problems are overwhelmingly structural. First off, the vast majority of the bill of materials for a solid-state drive is the NAND flash -- and just about every NAND flash producer builds and sells its own solid-state drives.To illustrate the point, consider that OCZ needs to compete directly with Samsung.
Samsung designs its own SSD controller (likely built at its own logic manufacturing plants), builds its own NAND flash, and sells plenty of its own computer systems. This means that Samsung can produce solid state drives entirely in-house and has an extremely large customer base (and strong brand, to boot).
This means that unless OCZ's drives are differentiated enough to command a pricing premium -- or the company is willing to eat dirt for margins -- it's going to be very tough to make money selling these drives.
The company claims that it is aggressively pursuing the enterprise flash space. This could work simply because enterprise flash vendors aren't just packaging up NAND and selling it -- there's very often a value add on the software/full-solution side of the house.
Unfortunately, the NAND players are getting in on this, as are many other better-capitalized, better-run companies. There's no silver bullet to OCZ's success, and it is likely that the company simply doesn't have the resources to deliver.
An insider buy could go a long way
sTec, another enterprise SSD play, was in a similar bind not too long ago. It had plenty of cash, so liquidity wasn't really a problem, but its business was doomed. It was in the position of needing to triple revenues to break even on a quarterly basis.
Management showed initial support by purchasing shares on the open market on several occasions -- although their bets, along with those of the common stockholders, quickly turned sour. But, at the very least, the insiders showed some confidence in the future of the company.
If OCZ's management wants to signal that they believe that there is a reasonable chance of success, they need to hunker down and put some of their own cash on the line. Not only does this usually provide a nice short-term boost to share price, but it gets investors thinking that the long-term story may play out.
The problem is that OCZ's management hasn't bought shares. Not a single purchase has been made on the CEO's part since he took the helm about a year ago. The prior management team, along with some of the current executives, sold shares like crazy in the $7-$8 range, but have not had the conviction to buy even now that the share price is a 10th of where it was about two years ago.
Foolish bottom line
If the insiders trying to turn this ship around won't eat their own cooking, why should investors? If management truly believes that there is a reasonable chance that they will save the company, then now is the time to load up. The problem is, not a single insider has shown enough confidence to buy a single share on the open market. Unless somebody on the executive team steps up and puts their own money on the line, this stock should continue to be avoided.