Panic-Selling Just Unveiled a Tremendous Value Play Here

A couple of years ago, OCZ Technology (NAS: OCZ) was largely a maker of memory modules and video cards for the gaming enthusiast market. The "OC" in OCZ stands for "overclocking," or pushing computer chips to run at speeds they were not designed to handle.

That all changed in 2011, when OCZ dumped its traditional memory market in order to refocus on solid-state drives -- the memory-based alternative to hard drives. That drastic change from niche to mainstream took courage but is paying off in spades.

In Wednesday's fourth-quarter report, OCZ presented 71% year-over-year sales growth and 93% of the revenue came from SSD products. The company saw a non-GAAP net loss of $0.11 per share, worse than the $0.02 loss reported a year ago and far short of the consensus analyst estimate for a $0.09 profit per share.

Share prices jumped at first, inspired by very strong revenue guidance for the just-started 2013 fiscal year. But the next day, investors switched their attention to the earnings miss, sending share prices on vacation in Mexico -- way south of the border.

The earnings miss looks bad but is not uncommon for a young company adjusting to rapid growth. Gross margins actually expanded for the fourth quarter in a row, starting with a dramatic jump when OCZ jumped into the SSD market with both feet. And that trend should continue, driven by a couple of nifty moves:

OCZ gave up buying memory chips on the spot market in favor of negotiating supply contracts with Micron Technology (NAS: MU) , Toshiba, and Hynix. This way, OCZ should qualify for volume discounts and reduce the volatility of supply prices.

The company now prefers making its own drive controller chips rather than buying them from LSI (NYS: LSI) subsidiary SandForce. For one thing, OCZ isn't handing profit margins over to a competitor. For another, OCZ's chips actually beat SandForce's finest controllers in independent performance tests and can be marketed as a top-shelf product that deserves a pricing premium.

If the direct benefits of making controllers weren't enough, OCZ is also selling those chips to other SSD builders. The gross margins there are more than twice as wide as the SSD gross take, so it's an attractive project.

You don't see many stocks trading at six times forward earnings while annual sales are growing at a 70% clip. OCZ Technology fits that bill, and Mr. Market should catch on when the company turns profitable later this year. I have a bullish long-term CAPScall riding on that prediction. OCZ could be the next rule-breaking multibagger, and I don't want to miss out on that.

At the time thisarticle was published Fool contributorAnders Bylundowns shares in Micron but holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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