OCZ Technology Group Inc. (OCZTQ) has never been cheaper for an acquirer looking to profit from the shift to flash memory in personal computers and video games.
OCZ shares plunged yesterday after the San Jose, California-based maker of solid-state disk drives said fiscal second-quarter sales were lower than prior forecasts because of a shortage of memory chips used in its products. The tumble in the $294 million company’s stock to as low as $3.90 sent OCZ below its previous record low closing price relative to book value, according to data compiled by Bloomberg.
While supply constraints caused the revenue disappointment, OCZ said demand for its drives is strong and bookings are higher than expected, and analysts still project it will generate the industry’s fastest sales growth over the next two years. After the stock drop, Piper Jaffray Cos. says OCZ may be more willing to accept a deal and could attract Seagate Technology Plc (STX) or Micron Technology Inc. (MU) as they look to benefit from the growing flash-technology market. One trader bought bullish OCZ options contracts yesterday that pay off if the stock climbs to $7 or $8, and MKM Partners LLC said that could be a bet on a takeover.
“OCZ stands out as being extremely cheap on a valuation basis,” Karl Richter, senior fund manager for West Conshohocken, Pennsylvania-based AlphaOne Capital Partners LLC, which oversees more than $450 million, said in a telephone interview. “This is absolutely one of the highest unit growth areas in technology. M&A does make sense here.”
Bonnie Mott, a spokeswoman for OCZ, didn’t immediately respond to a phone call and e-mail requesting comment.
Formed in 2002, OCZ makes solid-state storage drives for use in PCs, gaming devices and mobile-phone handsets, as well as data centers and storage-area networks. The drives, employing flash-memory semiconductors and technology with no moving parts, are faster and more efficient at storing and accessing data than the traditional hard-disk drives that rely on spinning platters to hold information.
OCZ shares surged 30 percent to $7.08 a share on July 27 after Bright Side of News, an online industry publication, reported that Seagate may buy the company. The stock then retreated last month as no deal materialized.
This month, after the close of the market on Sept. 5, OCZ reported preliminary fiscal second-quarter sales of $110 million to $120 million, down from a prior projected range of $130 million to $140 million. OCZ blamed the shortfall on a shortage of certain Nand flash components -- semiconductors used to store data -- and said gross margins will also suffer as the company used higher-cost flash memory on some of its products to fill the gap caused by the tightened supply.
OCZ management said on a Sept. 5 conference call that its bookings have still been higher than expected and it continues to carry a “significant backlog.” The company didn’t provide a full-year revenue forecast.
“They went out of their way not to update guidance, so that tells you that their visibility at this point is limited due to this Nand supply issue,” Alex Kurtz, an analyst with Sterne Agee & Leach Inc. in San Francisco, said in a phone interview. “That’s going to impact the revenue outlook for the company at this point.”
OCZ’s shares tumbled as much as 27 percent yesterday following its preliminary sales announcement. It fell to 1.05 times the value of its net assets, below its lowest-ever price-book ratio of 1.13 reached in June, according to data compiled by Bloomberg. The stock ended the day valued at 1.18 times book value, the data show.
The company was also trading at a 47 percent discount to projected sales of $552 million for fiscal 2013 ending in February, based on the average of seven analysts’ estimates updated yesterday after OCZ’s statement.
Today, OCZ climbed 4.9 percent to $4.56 at 12:27 p.m. New York time, the second-biggest advance among 411 stocks in the Russell 3000 Technology Index.
The seven analysts are still forecasting OCZ’s sales will climb 114 percent by the end of fiscal 2014, according to the estimates. That would top revenue growth projected at all other similar-sized companies in the data-storage industry, including OCZ’s two closest rivals, Fusion-io Inc. (FIO) and Stec Inc., data compiled by Bloomberg show.
Seagate, the world’s largest maker of computer-disk drives, and chipmaker Micron may be lured by OCZ’s technology, said Andrew Nowinski, a Minneapolis-based analyst for Piper Jaffray. Western Digital also would be a logical buyer, said AlphaOne’s Richter.
Micron supplies Nand flash memory chips to OCZ to use in its drives, so the companies already have a relationship and Micron could look to buy it, according to Richter. Seagate and Western Digital Corp. (WDC) also could benefit from buying OCZ because the market for OCZ’s drives is growing faster than the hard-disk drives Seagate and Western Digital produce, he said.
“For now, the absolute unit shipments of solid-state drives are small compared to hard-disk drives, but solid-state drives are growing tremendously,” Richter said. “Those guys are looking out a couple of years and seeing that this becomes a much greater market.”
Brian Ziel, a spokesman for Dublin-based Seagate, Daniel Francisco, a spokesman for Boise, Idaho-based Micron, and Steve Shattuck, a spokesman for Irvine, California-based Western Digital, said the companies don’t comment on speculation, when asked whether they are interested in acquiring OCZ.
While the desire for a foothold in the flash-memory drive market will likely spur companies to make acquisitions, OCZ isn’t at the “top of the list” of targets because it doesn’t have enough of a technological advantage to stand out from its peers, said Edward Parker, a New York-based analyst at Lazard Capital Markets LLC.
“Historically they haven’t had a lot of technology, they’ve relied primarily on third parties and they’ve assembled it themselves,” he said in a phone interview. “If you look around where consolidation in the market has been, it has been around pockets of technology leadership.”
Gary Mobley, a St. Louis-based analyst at Benchmark Co., said that Seagate has described the type of solid-state drive company it would want to acquire as being one that is software-centric and profitable.
“Neither one of those characteristics are possessed by OCZ,” he said.
The company reported losses in each of the last four fiscal years, data compiled by Bloomberg show.
Still, shareholders frustrated by the price drop may now start pushing for a sale, said Piper Jaffray’s Nowinski. If OCZ were to receive an offer for $7 to $8 a share, the company would have to take it seriously, he said. OCZ options activity yesterday was concentrated on that price range.
An investor bought 4,000 OCZ October $7 calls for 15 cents each and about the same number of bullish October $8 contracts for 10 cents each, according to data compiled by Bloomberg. The trader is positioning for the stock to go above $7 and possibly higher than $8 before the options expire on Oct. 19.
“These investors appear to be trying to take advantage of today’s sell-off in order to position for a significant upside move in the near-term,” Kurt Ayling, a New York-based technology analyst at Susquehanna Financial Group LLP, said in an interview. “They appear to clearly have bullish intentions as these are not exactly the type of calls that you would use for a more conservative strategy, such as to hedge a short position, because they are so far out-of-the money.”
About 33,000 calls to buy the stock changed hands yesterday, 5.4 times the four-week average and the highest since the end of July, the data show. The bullish volume was 2.9 times more than the number of puts to sell.
The bet that OCZ’s stock will climb more than 61 percent in the next six weeks could be a sign of takeover speculation, according to Jim Strugger, a derivatives strategist at MKM Partners in Stamford, Connecticut.
“Although OCZ pre-announced negatively and the stock dropped, there still appears to be interest in positioning for a potential takeover,” Strugger said in an interview. “The October $7 and $8 strike calls were bought to open and likely require a significant catalyst such as an acquisition to be in the money.”
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