The Bear Case for OCZ Technology Group
- Posted by Tech Insidr
- on August 14th, 2012
There are 2 main options to consider: (1) find ways to increase profit margins and start more retaining cash or (2) sell more equity to raise cash.
Unfortunately, OCZ Technology Group ($OCZ) finds themselves in this tough position after a year of record-setting revenue growth.
This isn’t a new situation for OCZ, as the company faced a depleting cash balance at the end of 2011. OCZ’s methodology of slashing prices and aggressive rebate promotions resulted in razor thin margins and the business simply wasn’t sustainable without raising more cash.
During the quarter ended on 5/31/12, OCZ’s cash balance decreased 53% to a paltry $43.23M, which is beginning to raise red flags for me.
It just goes to show that top-line growth is not always an accurate predictor of long-term success. While Wall Street places a huge importance on top line growth, some business models are simply unsustainable in the long-run (yes, even ones with explosive revenue growth!).
So the company had no choice but to sell more equity last year in the form of a secondary offering that was announced on 2/1/12. The secondary offering, which priced at $9/share, allowed the high tech firm to raise $110M of cash.
So where are we at today?
It appears that OCZ could be left with no option but to sell more equity to raise cash. The company’s cash balance is rapidly depleting while inventories and accounts receivable continue to rise. In order to fuel growth on razer-thin margins, cash is a necessary ingredient.
The chart below details OCZ’s cycle of depleting cash with concurrent spike in inventory / accounts receivable.
If you look closely at the chart, one can see the similarities between OCZ’s position towards the end of 2011 and now.
OCZ ended up raising $110M from that secondary offering, but the stock took an absolute nosedive since that announcement.
Could it happen again?
I don’t think it’s out of the realm of possibility.
When a company has growth projections to meet and they are burning cash at a rapid pace, sometimes the only solution is to sell shares.
At the time of this writing, Rob currently has a long position in $FIO. Rob formerly worked at Intel Corporation.
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Rob a.k.a. Techinsidr has been trading stocks and following the stock market since 1997. He formerly worked at Intel Corporation in a Financial Analyst role, responsible for overseeing an annual budget of $160M... More »