Sometimes, Mr. Market acts like a senile old grandpa. No matter how many times you tell him that changes are coming, or how far in advance, he'll still reach for his personal defibrillator when the long-expected news actually happens.
That is the case with solid-state storage expert STEC (Nasdaq: STEC) today. The company warned us months ago that its largest customer had been stocking up on STEC drives and wouldn't need to order any more in the first quarter, which led to an arguably well-deserved punch on the nose the next day. Now that the first-quarter figures are in, they show that main squeeze EMC (NYSE: EMC) indeed did put down its ordering pen for a while, but STEC's net loss still came in at the most positive end of management guidance, and sales beat expectations outright. And still, STEC's stock is stuck at a 5% loss today before a late-day rebound. Go figure.
Without EMC's order inflow, STEC's sales dropped 39% year-over-year to $38.8 million. $0.11 of GAAP losses per diluted share look terrible next to the $0.07 net profit per share seen a year ago. Hardware distribution agreements with IBM (NYSE: IBM) and Oracle (Nasdaq: ORCL), among others, were not even close to overcoming the lack of EMC orders -- that storage giant stood for 62% of STEC's business last quarter, after all.
So does that mean that the market for STEC's solid-state drives is dead, done for, pining for the fjords? Not hardly.
Solid-state storage is much faster than the traditional hard drive model of spinning magnetic discs. Solid-state also draws less power and is impervious to many kinds of physical jostling that would destroy an old-school hard drive. But it's also much more expensive, and the recent memory chip price war between global memory giants like Micron Technology (NYSE: MU) and Samsung, both key suppliers and competitors, didn't close the price gap with traditional hard drives as much as you might expect.
So the market is taking a breather while drive makers like STEC and SMART Modular Technologies (Nasdaq: SMOD) work on educating consumers and corporate customers about the benefits of this next-generation technology. Market research firm Gartner sees solid-state sales more than doubling in 2010, and tripling in the case of enterprise-class drives. That should give STEC plenty to cheer about by the end of the year as EMC and other corporate customers get back to their normal order patterns.
And I think that STEC will make it through this trough to enjoy the good times at the end of it all. The losses are reasonably small even when EMC is absent, and STEC's sterling, debt-free balance sheet is enough to patch over some rough spots.
I'm heading over to CAPS to give STEC an "outperform" rating for the next year or so, in order to take advantage of the currently depressed share price. You're welcome to cast your own vote on STEC -- or any of the other 5,000 stocks in the CAPS system.
