Will STEC (STEC) Fill Its Gap?

A reader mentioned STEC not 48 hours ago in one of the comments sections; asked my take on the chart. At the time I believe my exact quote was "eh". :) Nothing exciting either way...

STEC (STEC) fell off a cliff yesterday and continues down another 3% today after a downgrade it appears. I hope said reader did not buy this stock Wednesday.

• Thursday wasn't pretty for memory chipmaker Stec(STEC), which tumbled nearly 17% by the closing bell.
• Earlier, an analyst for Wedbush Morgan cut Stec's price target to $39 from $45 citing increasing competition in the enterprise solid-state drive market "intensifying above our previous expectations," though she kept her Outperform rating intact.
• According to Dow Jones, the analyst wrote that downward pressure could continue on the stock even though Stec may beat bottom-line third quarter estimates and though a jump in its fourth-quarter estimates may be on the horizon.

I mention this stock because it is still up... (wait for it) 640% for the year, and unlike say... AIG ... actually is making money. But it shows you when a high momentum stock reverses, it can get ugly very fast.

From a technical point of view its uptrend is of course completely busted and now we sit and watch to see if that yawning gap at $28 gets filled.

EDIT - reader makes a good point "wasn't the gap filled August 7th"?
Answer - if you draw with ball point pen, no. If you draw with crayon, close enough.
Aug 7th low $28.35
July 15th high $28.27
We'll find out soon enough one way or the other

I don't normally buy charts like this but this is still a unique business and I wouldn't mind the valuation down there. I doubt it would turn on a V there since momo guys will have abandoned it, but I am a growth at reasonable valuation guy so it fits my profile (albeit I'd hate the chart) As I type the stock is at $30.50 (low of day $30.00); $2.50 to go to "fill that gap".

p.s. looking way back, there is also a gap just over $10 ;) hopefully that one won't fill until 2013 or so when STEC's technological lead is obliterated.

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EDIT 2:30 PM - I see Forbes just put out a story as well; relatively negative view.

• As is the case for many things in the world of technology, the SSD story is actually fairly complex. SSDs use NAND flash chip--just like the tiny memory cards you use in music players and digital cameras--to replace traditional hard disk drives. The benefits are easy to understand, and include lower power consumption, higher statistical reliability and higher speeds. The obvious downside is higher cost.
• In enterprise applications where STEC specializes, however, there are unique trade-offs and higher cost is not always the case; in some applications, using SSD technology can actually lower total system costs. This is where STEC has leveraged its first mover status and the "controller" technology that it developed which enables enterprise class flash-based storage. While its controller and packaging technology have proven to be popular, there are two weak links in STEC's business model that I believe will become more visible as time moves forward.
• (1) In a research note released on September 17, Wedbush Morgan analyst Betsy Van Hees stated that competition in the SSD market "is intensifying above our previous expectations," and noted, according to her sources, that "Toshiba" "is in the final qualification stages" with one of STEC's tier one enterprise customers. This means that Wall Street is catching on to the first part of the changing story in SSD.
• (2) In the fourth quarter of 2008, NAND flash suppliers were selling parts significantly below production costs (at negative gross profit margins). In the first quarter of 2009, we saw prices rebound somewhat, but still not enough to bring gross margins out of the red. Since March, prices have climbed further and gross profit margins for NAND flash memories have rebounded nicely. The short story here is that it was very easy for STEC to make a ton of money when it was able to buy the key component of a solid state drive for less than its production cost and leverage that with its controller technology. As the price for flash rises, however, the leverage in the bill of material shifts to favor NAND flash manufacturers that are now hotly pursuing the enterprise SSD markets.

And this is why "technology" with very few exceptions is nothing different than an old school industrial business - it only is labeled with sexier wallpaper (I guess silicon is sexier than carbon?). Any competitive advantage is very difficult to keep over the long run, and shelf life is relatively short. After huge initial growth spurts - most sectors become saturated and turn into normal cyclical business; no different than building any other widget. But the Kool Aid in the investing world is technology is some high growth, magical place where the business cycle does not apply. I thought that died in 2000, but I guess with every decade comes a new class of folks to learn old lessons.

STEC, Inc. designs, develops, manufactures, and markets custom memory solutions based on flash memory and dynamic random access memory (DRAM) technologies.

[July 16, 2009: STEC - Keeps on Tickin', Never Quittin']

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