Stec Upgraded to Buy at Benchmark

Benchmark Capital has upgraded shares of Stec, Inc. (NASDAQ:STEC) to buy from hold, saying that the solid-state drive maker should benefit from the rapidly growing enterprise-class SSD market.

We also believe that investors should not underestimate STEC's key points of differentiation within the SSD market including a heavy software focus (e.g. CellCare & S.A.F.E.), proprietary ASIC-based controller capability, a high level of vertical integration and a strong patent portfolio, analyst Gary Mobley wrote in a note to clients.

Because of automated tiered storage, whereby frequently accessed files are automatically saved on tier-zero SSD arrays, SSD penetration has grown to 2 percent to 3 percent of all enterprise-class storage capacity.

SSD penetration should rise to 10 percent by perhaps 2014. The result, according to IDC, will be a 58 percent compound annual growth rate in enterprise-class SSD units from 2010 to 2014, the analyst said.

Meanwhile, there are several risks with respect to STEC's investment merits, the most significant of which relates to SSD market share loss. Coinciding with EMC's move to MLC-based SSDs later this year, Stec's share at EMC will likely drop for the balance of fiscal 2011 (FY11), before possibly improving in fiscal 2012 (FY12).

However, if STEC loses less than twenty percentage points of enterprise-class SSD market share during the next two years, and assuming lower-cost SSDs will drive elasticity of demand, the company should be able to post upside to FY11 and FY12 consensus revenue estimates.

..given the recent 25 percent-plus sell-off in STEC's share price, we believe the risk-reward profile justifies a long position in STEC shares, wrote Mobley, who has a $21 price target on Stec shares.

Shares of Stec closed Friday's regular trading session at $14.80 on Nasdaq.