Disk-Drive Maker STEC Looks to Profit
Amid the worst downturn ever in the disk drive business, there are still cutting-edge data-storage technologies that can grow rapidly and profitably. These emerging technologies won't help the industry's established vendors, but could boost the fortunes of smaller specialty companies.
One potential beneficiary: STEC (ticker: STEC). After 19 roller-coaster years in the solid-state disk-drive business, the Santa Ana, Calif., company is hitting its stride. Though shares are down 41% from their 52-week high, the stock has more than doubled, to 8, since November 2008, giving STEC a market capitalization of $394 million.
STEC's disk drives are much faster than traditional spinning hard-disk drives, and use far less power. That is because they are made of flash-memory chips, similar to those in Apple 's (AAPL) iPod.
STEC has a lock on the most expensive kind of drive, which it sells to EMC (EMC) and other makers of storage equipment for large corporations. Unlike disk drives, STEC's wares cost thousands, not hundreds, of dollars. The payoff is far greater profitability than traditional disk-drive makers, which could help the shares outperform in a recovering market.
STEC trades at 1.7 times this year's projected sales, 17.4 times 2009 earnings estimates, and 11.5 times 2010 forecasts. Yet profit is expected to increase by 51.6% this year, to 47 cents a share.
While many companies, including SanDisk (SNDK) and Korean giant Samsung (005930.South Korea), sell storage containing flash chips to consumers, STEC sells only to large storage-equipment makers, and in small quantities. By wrapping complex circuitry around flash, it gets market-beating profit margins.
This year is expected to be the worst on record for disk-drive makers, with sales falling by 15% or more from 2008. Yet shipments of flash drives like those STEC sells are expected to rise 227% between 2007 and 2012, according to research firm IDC.
It is STEC's game to lose. The company is supplying nearly all the top makers of storage equipment, including EMC, Sun Microsystems (JAVA) and Japan's Hitachi Data Systems. Deals with IBM (IBM) and Hewlett-Packard (HPQ) could be announced soon. As a result, STEC's main product, the ZeusIOPS, saw sales climb 300% last year, to $53 million.
Analysts think STEC's disk-drive performance has about an 18-month lead on competitors. "I look at the design wins in the marketplace, and right now, this market is all theirs," says B. Riley analyst Mike Crawford.
Intel and Hitachi could be next in line, but "it is going to take them till early next year to come out with a competitive product," and longer to get it accepted by storage-equipment vendors, adds Needham analyst Richard Kugele.
STEC's 50-year-old co-founder and chief executive, Manouch Moshayedi, came to the U.S. from Iran in 1979. He says the company's biggest advantage is its 30 flash-memory-drive patents, and 53 pending patents. Seagate filed a patent-infringement suit against STEC last April, but dropped all charges last month.
Little companies with hot technology will always have competition from big companies with more resources. But with its patents and customer deals, STEC is far more likely to be bought out than pushed out of this market.
