market news and articles @ firstadopter.com

-markets will go through a rocky period in the next few months
-emerging economies are slowing
-Europe looks dangerous “double dip”
-I like to look forward not backwards
-PIIGS looking at negative growth going forward, bad for Germany
-see tremendous slowing in China. Tightening, first time housing prices rising less than mortgage rates. Will lead to a dramatic slow-down in construction
-Chinese will continue to tighten, economy will slow into next year, inflation is dangerous for them due to “social issues”
-U.S. dollar has been beaten down so much, “tremendous short position out there”, dollar will rise, valid into Fall of this year
-markets are always running ahead of the fundamentals
-EM will stimulate in 2012 and currencies will then strengthen
-commodity sector is most exposed to risk, particularly the base metals, dramatic inflow of money, so over-heated. Once we see slowing growth in China/EM, this sector will be hurt the most
-short copper, be defensive – household products, utilities, food/beverages, away from basic resources/energy
-in next 5-6 years, bonds look awful. Bernanke doing opposite of Volcker. Bernanke is putting more and more liquidity, negative real interest rates, debasing of currency, rising inflation, rising interest rates, rising bond yields
-however it could take 2-3 years before bond yields take off
-as soon as authorities see asset prices are declining, governments will do QE3 or QE4. It will be global in nature
Link

More Felix Zulauf articles: Link

A bit of background here. The market leader in SLC (single-level cell) based SSD drives is STEC. SLC technology has historically been more reliable than MLC (multi-level cell), but more expensive. However thanks to recent improvements, MLC has become reliable enough where companies are now willing to use it due to its lower cost. The market leader in affordable MLC SSD drives is OCZ.

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EMC put out a press release today titled: EMC Outlines Strategy to Accelerate Flash Adoption [Link]. It is very bullish on the future adoption of enterprise SSDs across their storage system products. However the line that caught my eye was this one:

EMC plans to design, test and qualify MLC-based SSDs for enterprise-class applications and incorporate them into EMC systems later this year, making enterprise flash storage more affordable.”

Then I remembered what OCZ said on their 5/3/11 earnings conference call last week [Link]:

We have recently seen a sole source design in with our Deneva series to well known enterprise class storage system OEM, who we expect to ramp to mass production quantities in our fourth quarter. And though we are still determining potential revenue for this client, we’re excited in our ability to win and compete with this business.”

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The number of coincidences here is interesting:

1) Is EMC a well known enterprise class storage system OEM? Yes.

2) Is OCZ Deneva an affordable enterprise MLC-based SSD? Yes.

3) Does the EMC timing of “later this year” match up with OCZ Q4 timing mentioned on the conference call for this win? Yes.

I want to emphasize I have no hard information if OCZ has won any business from EMC. I’m just an investor connecting the dots from EMC’s press release today and OCZ’s earnings conference call last week; but given all the multiple data-points and with the timing matching up perfectly, it sure makes you think.

Disclosure: The author is long OCZ at time of writing.

There is a misperception that OCZ is a consumer oriented PC hardware company due to its past history. 90% of OCZ revenue is SSD.

Only 7% of SSD revenue is consumer and the rest of SSD revenue is high performance/server and data center/cloud computing enterprise.

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The Deneva enterprise SSD and Vertex 3 server SSD products are the key drivers of 2011 growth.

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“This growing market awareness and recognition has translated into solid business momentum. As every segment of our SSD business grew rapidly this quarter. In addition to our first Tier-1 OEM that is now shipping in volume, we have continued to achieve a number of design wins.

For example we received orders recently from a large Asia Pacific based telecom service provider for our Deneva series of SSDs and they’re expecting this client to start limited deployment this year, and to ramp considerably over the next 24 months.

We have recently received initial orders from our Deneva series with a new high performance computing OEM who we expect to roll out to a major cloud computing service provider over the next two quarters.

We have recently seen a sole source design in with our Deneva series to well known enterprise class storage system OEM, who we expect to ramp to mass production quantities in our fourth quarter. And though we are still determining potential revenue for this client, we’re excited in our ability to win and compete with this business.

We recently qualified our Deneva SSDs from Palo Alto networks, a provider of next generation enterprise firewalls, and we’re in the final stages of qualification and pricing with a large data center for our VeloDrive. Should this business come to fruition, it could represent a significant portion of our PCIe-based SSD sales through fiscal ’13.” – OCZ Q4 2011 conference call on 5/3/11 [Link]

New enterprise design wins mentioned on the conference call:

1) Tier 1 OEM shipping in volume
2) large Asia Pacific based telecom service provider (Devena enterprise SSD)
3) new high performance computing OEM rolling out to major cloud computing service provider over next two quarters
4) sole source design win (Devena enterprise SSD) to well known enterprise class storage system OEM
5) design win with Palo Alto networks for their next generation enterprise firewalls (Devena enterprise SSD)
6) large data center (enterprise PCIe VeloDrive)

OCZ clearly states design wins from #2 to #6 are NOT included in current guidance.

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At Friday’s close of $6.77, OCZ is trading at 0.9 CY2011 EV/sales growing at 99.5% y/y (SSD revenue +380% y/y). STEC is currently trading at 2.2Xs CY2011 EV/sales and really isn’t growing much if you take account the EMC inventory burn-off catch up.

OCZ has a similar SSD revenue growth ramp with Fusion-io in both absolute revenue numbers and y/y growth. Fusion-io is an enterprise SSD company which was named the #1 venture capital funded technology company in 2010 by the Wall Street Journal. Fusion-io’s products are higher end, higher ASP, and higher margin. However if it comes public at the rumored 10Xs sales valuation or any multiple significantly higher than OCZ/STEC, the relative valuation discrepancy will be stunning.

OCZ in the last quarter had a non-GAAP net profit of $1M ex-a $1.8 million loss associated with the discontinued memory business (there will be no more memory business after this quarter). The ramp of the enterprise SSD design wins in 2011 will help OCZ scale into its long-term model of 28-32% gross margins and 13-17% operating margins stated in their earnings press release.

Source of first 2 slides is the excellent OCZ presentation here: Link

Disclosure: The author is long OCZ at time of writing.

Q4 Press Release
-revenue $64.6M (+99.5% y/y) vs. $64.04M est. (in-line with 3/7/11 upside pre-announcement Link)
-SSD revenue $58.2M (+380% y/y, +40% q/q)
-$94M in net proceeds from April public equity secondary
-non-GAAP operating profit of $0.1M including $1.7M operating loss from discontinued memory products
-EPS –2c vs.-3c est.

Guidance
-re-affirmed FY2012 revenue guidance $300-330M (+60-75% y/y) vs. $319.4 est (in-line with 3/28/11 upside pre-announcement Link)
-Indilinx SSD controller acquisition will increase gross margins 200-400bps within 12 months
-recent April capital raise will improve profitability and support increased OEM sales
-long-term non-GAAP model of gross margins 28-32% and operating income 13-17%

Conference Call
-seeing increased SSD design-in activity at an “inflection point.” Considerable success in new PCIe enterprise SSD design wins
-3 new OEM design wins that are “incremental” to current guidance: 1) large Asian telecom service provider 2) major cloud computing service provider 3) single-source product design win at “well known” Tier-1 enterprise storage company
-Because there is so much activity on SSD design wins, capital raise, SSD controller design wins they decided to wait and update fiscal year guidance to the “upside” next quarter
-currently at 100% utilization they have $40M/month of SSD manufacturing capacity. Due to significant orders they will double manufacturing capacity in the next 90 days
-gross margins will go directionally up going forward (discontinuing memory business + higher margins from using internal Indilinix SSD controllers)
-they have new design wins for their Indilinix SSD controller business which is not in guidance
-regarding competition in the PCIe SSD market “the whole field is us [OCZ] and Fusion-io. 1/2 their Q4 enterprise revenue was PCIe SSD (OCZ is Fusion-io Lite!)
-“enormous, enormous demand for Vertex 3” “Demand was 3X their ability to ship” Sees considerable upside to Vertex 3 starting in June

Net-net
OCZ printed the Q4 numbers they pre-announced in March at +99.5% y/y revenue growth, +380% y/y SSD revenue growth, and an operating profit ex-the now discontinued memory DRAM business, but that is not the story. The story is the conference call talking about the future, which was incredibly bullish.

OCZ said on the call they are doubling their current SSD manufacturing capacity within 90 days. Today at 100% utilization it is $40M of SSD manufacturing revenue capacity a month ($120M a quarter). In 90 days, they will have manufacturing capacity of $240M of SSD revenue a quarter at 100% utilization. They just did only $58M of SSD revenue in Q4.  Think of the revenue upside potential.

All this doesn’t mean anything unless there is demand. Fortunately OCZ’s core new SSD product Vertex 3 is selling like hot-cakes. Management said Vertex 3 has “enormous, enormous demand” 3X (yes 3X!) more than they can ship. They will be able to ship more upside starting in June (presumably when new manufacturing capacity comes on-line).

OCZ said current full year guidance doesn’t include all the design win activity. They want to digest it all before updating the guidance to the “upside” next quarter. This design win activity that is NOT in the current full year guidance includes 3 big OEM design wins (large Asian telecom service provider, major cloud computing service provider, single source product win at “well-known” Tier-1 enterprise storage company) and new SSD controller design wins.

Given the tremendous demand for Vertex 3, all the incremental design wins not included in guidance, and doubling of SSD manufacturing capacity, it looks very likely OCZ will crush the current $300-330M (+60-75% y/y) revenue guidance for FY2012. If I assume 75% utilization of the next 4 quarters SSD manufacturing capacity, I calculate full year SSD revenue of $630 MILLION.

Bush administration officials have been clear that one of the key reasons for invading Iraq was to establish a significant democracy in the Middle East. The thinking was this would spread democracy in the region, lead to hope and prosperity, and provide an alternative to radical Islam for the hearts and minds of the youth in the region.

The irony is democracy is now spreading in the Middle East not due to Iraq, but through the power of the masses using the internet enabled by American Silicon Valley start-ups like Twitter and Facebook.

So as we celebrate the victory against Al Qaeda today with the passing of Osama Bin Laden; let us remember that we’re winning the war on terror not by military might alone, but by the entrepreneurial ingenuity of American capitalism.

As many of you know, Copperfield Research released a bearish report on OCZ today that had a detrimental impact on the stock price. I’m not going to do a point-by-point analysis of the ridiculous innuendo and claims in their report. The sell-side actually did a good job today refuting it (call your Stifel or Needham broker to get the defenses).

Copperfield Research has a history of putting in sensationalist key-words (“House of Cards” “Chinese reverse merger” “Not a Chinese Fraud”) in their reports and head-lines to get attention that have nothing to do with the companies they are covering. Shameful in my opinion, but it shows you the kind of character they have.

I bought shares in OCZ today as I believe the company makes the best performing SSD drives in the world today (read the customer reviews on Newegg, reviews by leading tech enthusiast sites like Storage Review), has tons of cash (they just raised $94 million last week), and many quarters of amazing growth ahead in what I believe is the best secular growth product cycle in technology today (SSD drives). There is no way this company is a fraud as Copperfield implies; I would bet my left arm on that, but that is neither here nor there as the fundamentals will come out and the stock price will reflect this in time.

I just want to point out this below.

On Copperfield Research’s Seeking Alpha profile page they explicitly say they do not use options to establish positions prior to a report’s publication. Moreover they do not discuss unpublished reports, or provide advanced warning of future reports to others.

Yet on 4/19/11, the day before the release of Copperfield Research’s bearish OCZ report, Minyanville’s Steve Smith noticed large put option activity on May $7.50 strikes, when OCZ stock was trading in the mid $9 range. Since Copperfield Research doesn’t let anyone know about their reports ahead of time, that put option volume must have happened by magic right? Pure coincidence I’m sure.

Disclosure: At time of writing, the author is long OCZ stock.

One of the hardest things for me to learn over the years is taking small losses (1-2%) isn’t a bad thing. Trust me I know it’s hard to do. The worst thing is to get run over with a huge loss when you are wrong. You should do your utmost to protect against that scenario.

The way the compounding math works is if you have a big draw-down from a huge loss, it takes a LOT more work and return to make that loss back.  For example when you lose 50%, you need to make 100% from there to get to break-even.  Thankfully compounding also works in a positive way; if you eek out positive gains upon positive gains, you get huge long-term returns. Just try it with a spreadsheet.

My point is I don’t mind taking lots of small losses or gains and then keep plugging away with smart rational fundamental idea setups because eventually I’ll hit some homers like GMCR 1-day 27% gain, BGP bankruptcy pin action trade idea, OVTI on EB+ earnings, and buy NFLX on price increase winner, etc. (all previous big FA Alert winners).  The key is to stay in the game for those big home-runs and not lose much on the other trades. Have a good day guys.

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If you like what you see above, be sure to check out my two paid services below as that is where you can exclusively find my fundamental trading idea flow now:

1) FA Alert – email trade alerts: http://www.firstadopter.com/fa-alert/
2) FA Chat – trading chat room: http://www.firstadopter.com/fa-chat/

Who says you can’t find good stuff on Twitter. Here are my 5 best fundamental tweets from my Twitter feed in the last 4 months.

1. GMCR on March 9, 2011

The Tweets: I tweet that the only logical move for Starbucks (SBUX) is to do a partnership or buyout deal with Green Mountain Coffee (GMCR). I then send out an FA Alert to buy GMCR to put my money where my mouth is.

Result: The next day Starbucks announces a partnership deal with Green Mountain Coffee and FA Alert subscribers make a 27% gain in one-day (Trade screenshot Link)

2. SINA on March 2, 2011

The Tweet: I tweet that SINA is the best public stock market vehicle to play the web 2.0 internet bubble due to their ownership of the Chinese Twitter.

Result: Although I wasn’t smart enough to buy it myself, the social networking valuation bubble went into over-drive with SINA moving up from $77.15 on March 2nd to $119.35 on April 8th for a +55% move in 5 weeks.

3. NVDA and MMI on February 7, 2011

The Tweets: I tweet that Nvidia Tegra 2 tablets will flop and Nvidia is a short as that flop news comes out. I also say Motorola Mobility’s Xoom tablet will flop hard vs. Apple iPad.

Result: Nvidia Tegra 2 tablets including the Motorola Mobility Xoom flop. Nvidia (NVDA) trades from $25.32 on February 7th to $17.55 on April 8th for a decline of 30.7%. Motorola Mobility (MMI) trades from $30.88 to $24.03 in the same time period for a decline of 22%.

4. Short BGP, Long BKS on January 28-31, 2011



The Tweets: I tweeted a prediction that Borders Group will declare bankruptcy in the coming weeks and BGP will go down and BKS will go up on the news.

Result: Borders Group did declare bankruptcy and their stock BGP got de-listed. Moreover BKS did go up on the BGP bankruptcy news and FA Alert subscribers were able to bank huge gains (Trade screenshot Link)

5. Buy oil, gold, farmers, and web 2.0 holding companies on December 5, 2011

The Tweets: After ranting against Bernanke money printing, I lay out the plan on how to play QE2. Buy oil, gold, farmers, and web 2.0 internet vehicles.

Result: From December 5th to April 10th, oil trades up 27%, gold up 4%, MOO up 8%, and web 2.0 private internet valuations go up a gazillion percent (Facebook, Zynga, Groupon, etc.)

If you like what you see above, be sure to check out my two paid services below as that is where you can exclusively find my fundamental trading idea flow now:

1) FA Alert – email trade alerts: http://www.firstadopter.com/fa-alert/
2) FA Chat – trading chat room: http://www.firstadopter.com/fa-chat/

WPRT – Congressmen introduce tax credit bill for natural gas vehicles. Link

According to a report, Nintendo sold only about half of its 3DS shipments in Japan. Link

OCZ – OCZ raises $81.3M with a secondary offering of 10.2M shares at $8.50. Link

NVDA – Nvidia expected to land Tegra 2 orders from Samsung. Link

CAT – Caterpillar executive warns of a tire shortage by the end of this year. Link

NXPI – Reuters reporting that a Dutch newspaper says NXP Semiconductor is in take-over talks with Intel, Qualcomm, and Broadcom. Link

EXPE – Expedia announces it is spinning off TripAdvisor. Link

BKS – Barnes & Noblie to open up Nook Color to Android app developers. Link

ADS – Congress is investigating the Epsilon email data breach. Link

STX – Seagate guides up Q3 revenue to $2.7B vs. $2.62B est. and raises their dividend to 18c a quarter. Link

“Niederhoffer said the buy-the-dip “risk-on” trade is the only one that’s currently working in the hedge fund industry. That’s left most managers’ returns highly correlated with the equity market.” Link

Frank Quattrone returns as the top tech investment banker. “Mr. Roux said the mystique around Mr. Quattrone had been overblown. It’s simple, he said: “Frank’s a very likable guy who knows what he’s talking about.” Link

EB+ TPX
Sell-side: SunTrust initiates FFIV with a Buy.
WSJ: MMI should merge with another hand-set maker to get better scale.

Trading Radar: TPX
Today’s POMO: 0