The Secret of Money-Doublers They Don’t Want You to Know
#9 Dot Hill Systems Corp. (HILL)
By Nick Atkeson and Andrew Houghton
Dot Hill Systems Corp. (HILL) manufactures low- to mid-range storage appliances that it
sells to companies like Hewlett-Packard (HPQ) and NetApp Inc. (NTAP).
Essentially, these storage appliances are sheet metal wrapped around a redundant array of independent disks (RAID). This hardware holds limited intellectual
property content, so HILL’s gross margins have been low, about 12% to 15%.
In September 2008, HILL bought RAIDcore and NAS (networked-attached storage) intellectual property assets from Ciprico Inc. (CPCIQ).
The acquisition was dilutive initially, but what is interesting about the RAIDcore acquisition is that it enables RAID storage via a software solution
rather than a hardware solution. This means that the functionality of RAID storage can now be purchased for 80% less. On top of this, software gross
margins are 90% to 95%.
In mid-November, NTAP reported better-than-expected earnings, revenues and guidance. Investors know that HILL is a NTAP supplier, so HILL may be
seeing some ripple effect from this. And studies point to improved IT spending in 2010. Additionally, it appears a major company has just qualified
HILL’s RAIDcore product.
Trading for about $2, the stock is basically an option without an expiration. A modest improvement in margins and revenues could cause a major improvement in profitability.
Given the potential for explosive appreciation in this stock that trades like an option, we recommend buying shares of HILL.
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