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Quantum Corp (NYSE:QTM) Is Oversold And Undervalued

Quantum Corp (NYSE:QTM) Is Oversold And Undervalued
Written by
Alex Carlson
Published on
February 2, 2016
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It's been a rough year for shareholders of Quantum Corp (NYSE:QTM). The stock has been the victim of an earnings miss, light forward guidance, hedge fund selling, CFO departure, and weakness in the broad storage market. However, we at Insider Financial still see hope. The company still has a business that does roughly $500 million a year in sales. Furthermore, the scale-out storage business has big potential. QTM is a name certainly worth looking into, especially for value investors.Quantum is engaged in providing solutions in scale-out storage, archive and data protection. The Company provides solutions for capturing, sharing and preserving digital assets over the entire data lifecycle. The Company provides solutions for storing and protecting information in physical, virtual and cloud environments. The Company’s scale-out storage portfolio includes StorNext software, appliances and systems called StorNext Pro Solutions, as well as Lattus extended online storage and Q-Cloud Archive services. StorNext 5 includes the streaming file system and policy-based tiering for automatically moving data across primary storage, online storage, tape archive and the cloud. The Company has portfolio of data protection solutions for physical, virtual and cloud environments. This includes its DXi deduplication systems, Scalar automated tape libraries and vmPRO virtual server backup software. It offers a Q-Cloud service for data center customers.In the third quarter, QTM reported earnings of $.02 per share. This missed the consensus estimates by one penny. Revenue of $128.05 million was 9.9% lower than last year and missed estimates by $7.19 million. Fourth quarter estimates call for revenues of between $118 million and $124 million. Earnings per share are expected to be between break-even and $.01 per share. The consensus among analysts was for revenues of $140.2 million and $.02 per share in earnings. Regarding the forward guidance, here is what CEO Jon Gacek said on the earnings call:

"First, that revenue range does not include any of the mega deals that we are working on. One or more of them to close in the quarter, but the timing of them is too uncertain to include them in our forecast. Second, the pricing of commodity products in the markets specifically tape, media remains quite challenging and as was a case in Q3 we will manage our tape media revenue to maximize profitability versus trying to maximize revenue."

The earnings miss and the weak guidance are what weighed on the stock initially. Further hurting the stock was the news that major shareholder Starboard Value LP sold 5,000,000 shares in a transaction that occurred on Monday, January 25th. The shares were sold at an average price of $0.71, for a total value of $3,550,000.00. While on the surface this looks like bad news, Starboard Value still owns about 20 million shares, so they are still committed and invested in the company.

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Regarding the departure of CFO Linda Breard. She resigned to pursue another opportunity after being with the company for 17 years. Most likely, she was after the CEO chair and that's why she left. We don't think the company will have any issues finding a replacement and don't see this as cause of concern.The bright spot for QTM is its scale-out storage business. For the third quarter, scale-out storage and related service grew to an all-time high of $35.7 million, up 31% year-over-year and 19% sequentially. For the nine months ended December, 31st, scale-out storage and related service grew 32%. Revenue from large deals, those in access of 200,000, was up nearly 50% compared to the same quarter in the prior year. Surveillance grew nearly 300% during the first nine months of Fiscal '16 and technical applications grew 165% during the same period. The number of worldwide partners selling scale-out solutions increased 32% over the same period last year. Overall, win rates for the quarter remained strong at 77% and QTM added over 120 new scale-out customers in the third quarter.

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Quantum Corp is forecast to earn $.05 per share next year and post $479 million in revenues. Based on these numbers, QTM is trading at just .25 times sales and 8 times next year's earnings. This is awfully cheap in today's markets. That's why we feel that shares have entered oversold territory and are due for a bounce. There's also the potential for a strong short covering rally as investors are short over 14 million shares. We will be updating Insider Financial with the latest developments from QTM. Be sure to sign up today and stay on top of all that is happening with QTM!

Disclosure: We have no position in QTM either long or short. We have not been compensated for this article.

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