Stay Away From OCZ

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It looks as though it's just about game over for OCZ Technology Group . While the company managed to become current with its SEC filings after an arduous, year-long wait, it's now apparent to even the most bullish OCZ investors that simply becoming current on long-overdue filings is not an upside driver. Indeed, with the books now open, it is now apparent that OCZ is unlikely to be able to continue as a going concern for too much longer.

This is a tragic fate, and one that has usually been avoided as desperate management teams eventually end up selling their companies to the highest bidder. However, given OCZ's condition, it is unlikely that a bidder will step in to buy the company at any meaningful premium to its current price, representing a market capitalization around $30.56 million. Indeed, while it may be tempting to speculate on shares here, keep in mind that the downside risk is still 100% of your investment.

What went so wrong for OCZ?
OCZ essentially tried to sell commodity solid state drives for which the bulk of the cost of goods sold was in the NAND flash. While OCZ had fairly little difficulty procuring NAND when the prices were depressed, Micron, Samsung, and others with NAND capacity have not only profited handsomely from the tightened supply industry wide, but have also made it exceptionally difficult for fabless players to make any real money without adding significant value on top of the NAND being sold.

OCZ's consumer products were largely undifferentiated. Sure, they may have been "faster" than the competition's drives, but given that all solid state drives are remarkably fast compared to their spinning platter counterparts, it really came down to cost. OCZ, believe it or not, with an inferior cost structure (due to having to pay the margins of the NAND producers), tried to undercut just about every player in the industry - including the very companies from which it was buying NAND.

This ultimately proved unsustainable, but was initially masked by rebate-driven shenanigans to mask the true cost of goods sold. Indeed, while the full extent of what was going on did not surface until after the year-long investigation and subsequent restatements, the idea was that OCZ was shoving much of the liabilities it faced due to the rebates into selling, general and administrative costs rather than cost of goods sold. In short, numbers that suggested that salespeople were working overtime to close deals turned out to be a rather devious ploy to mask the true unsustainability of the business.

The enterprise's last stand
Once founder and ex-CEO Ryan Petersen (the mastermind behind the shenanigans) was shown the door, the company made a final stand to try to focus the company on competing full-force in the enterprise flash storage space. Of course, this is a market dominated by monsters like Fusion-io and countless others, but it is a much higher gross margin business. OCZ, to this effect, acquired SANRAD - a privately held provider of flash caching and virtualization software.

Its goal was, simply, to try to go head-to-head with Fusion-io. While Fusion-io has its own problems to deal with, its gross margin profile is still solidly in the 50%+ range and its cash situation is quite healthy, even if growth has slowed significantly and even if GAAP profitability remains elusive. 

No dice. While OCZ's management continued to claim that it was making progress here, the sad reality is that revenue has been falling like a brick (as the company moves out of the consumer SSD business), its net losses have continued to widen, and the cash keeps burning.

OCZ made some rather unfavorable deals in order to improve working capital from Hercules Technology Growth Capital . The company quickly began burning through this, and now has but $48 million in current assets against $59 million in current liabilities. With $10 million in cash and about an $8 million per quarter cash burn rate, it is unlikely that OCZ survives to see this time next year as a publicly traded entity.

Foolish bottom line
Just stay far away from this stock. Don't try to be the hero and bet on a turnaround; contrarianism only works when you've got a good enough case to bet against the crowd. If you own the stock, then there's not much that can be done for you at this point; use your best judgment.

If you're fortunate enough to not be long the stock, continue to stay on the sidelines. There's much better risk/reward profiles out there than a failing, nearly bankrupt commodity flash storage drive player - guaranteed. 

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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