I ended my "outperform" CAPS call on STEC (Nasdaq: STEC) in February because the numbers didn't support the solid-state storage expert's lofty valuation. I feel pretty good about that decision today.
Three months ago, STEC's stock (say that five times fast!) had climbed more than 50% in the preceding quarter. Now the stock has lost some 30% of that peakish luster. In the meantime, direct rival SMART Modular Technologies (Nasdaq: SMOD) got a buyout offer from a private equity firm and the traditional hard drive industry hasn't exactly suffered. Western Digital (NYSE: WDC), SMART Modular, and Seagate Technologies (Nasdaq: STX) have all crushed the market since mid-February.
So STEC's first-quarter report beat analyst estimates with 145% year-over-year revenue growth and matched estimates of $0.32 in non-GAAP earnings per share as opposed to the year-ago period's $0.08 loss per share. Last year, STEC suffered from drastic order withdrawal from largest customer EMC (NYSE: EMC), so these are easy comparisons. Ultimately, investors are fretting over weak guidance, and the stock has collapsed in today’s trading.
You could argue that this 19% drop would make a buyout target out of STEC, and I can't completely ignore that possibility. In particular, Western Digital could use some in-house SSD mojo, which STEC would supply relatively cheaply at this point.
But STEC's jumpy results don't make it a very appetizing meal. Moreover, any buyout would likely show current management the door as STEC's real value lies in its technology portfolio. CEO and Chairman Manouch Moshayedi and his brother, COO, CTO, President, and fellow director Mark are the two largest owners of STEC shares -- just to complicate matters further. That means heel-dragging and outrageous price demands, which isn't exactly fertile grounds for a happy buyout ending.
So nothing much has changed since I turned bearish on STEC, except the share price. I'm staying on the sidelines until STEC cures its severe case of jumpy-itis. In the meantime, this stock belongs on my Foolish watchlist -- and yours. Click here to follow STEC's every move.
