Turning Your World Upside Down Can Pay Off Big
" Look, if you had one shot, or one opportunity
To seize everything you ever wanted in one moment
Would you capture it or just let it slip?"
-- "Lose Yourself," by Eminem
Enthusiast-grade memory module builder OCZ Technology (NYS: OCZ) faced exactly that situation about two years ago. The recently started solid-state drive division, which produces a memory-based alternative to spinning-disk hard drives, was just starting to take off in a big way. But that fledgling project collected only 8% of OCZ's sales in 2009 while memory modules stood for 64%.
Kill your darlings
So OCZ decided to kill its largest source of revenue. By February 2011, the memory division was no more and the formerly important power-supply unit had dwindled to 11% of sales. In last night's second-quarter report, SSD sales had jumped 252% year over year as the meatier unit prices widened gross margins from 4.3% to 21.6%.
Total sales doubled year over year to $78.5 million and GAAP losses turned into a tidy $0.06 of income per share. Cash flows were dramatically negative, which is something that makes my Foolish colleague Rich Smith nervous. However, that issue comes from a conscious choice to double inventory levels as OCZ doesn't want to leave orders on the table for a lack of product supply.
That gutsy choice to dump memory sticks is paying off in spades. The benefits are trickling down to investors, too. OCZ shares jumped about 14% on the news and have doubled over the past year.
And this is just the beginning. OCZ is moving on from competing mainly with SSD specialists such as STEC (NAS: STEC) and recently privatized SMART Modular Technologies. SSD products are expensive by nature and therefore lose out on many potential sales to enterprises with huge storage needs. But there are ways around that problem: By introducing hybrid SSD-plus-disk drives in partnership with Toshiba, OCZ now offers more cost-competitive alternatives to what Western Digital (NYS: WDC) and Seagate Technologies (NAS: STX) have to offer. SSD speed with magnetic-drive cost efficiency is one tasty combination.
From merely good to really great
OCZ certainly seized the SSD opportunity. In doing so, it gave up on an increasingly commoditized memory business and made everything about its operations better. It's like Walgreen (NYS: WAG) giving up on its restaurants to focus on drugstores, as told in Jim Collins' classic tome, Good to Great. That move created lasting success and a two-decade span of market-crushing investor returns: From 1978 to 2000, the Dow Jones (INDEX: ^DJI) index rose by 1,200%, but Walgreen investors enjoyed a 28,000% ride.
In more recent memory, Netflix (NAS: NFLX) is trying a similarly drastic strategy by first splitting DVD rentals off from digital streaming and presumably killing the DVD thing down the road. If it works, like it did for Walgreen and is doing for OCZ, CEO Reed Hastings will be celebrated as a genius. If not, he's killing his company. Nobody said that success was risk-free.
OCZ took Eminem's pop-culture advice to heart. I've seen enough proof of the new strategy's success to trust the new direction, and OCZ shares are trading at just 10.6 times forward earnings today. That's enough to make me invest some of my professional pride in the stock -- I'm adding an "Outperform" rating on OCZ in CAPS today and expect it to solidify my all-star CAPS rating even further in the next few years. Play along at home -- CAPS is a free, fun, and informative service.
What can the company do for an encore? To find out, add OCZ to your Foolish watchlist -- a steady stream of news and Foolish analysis on the stock will make sure that you don't miss a beat. Get started now!
At the time this article was published Fool contributorAnders Bylundowns shares of Netflix but holdsno other position in any of the companies discussed here. The Motley Fool owns shares of Western Digital.Motley Fool newsletter serviceshave recommended buying shares of and creating a bear put spread position in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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