It’s during fraught times like these, with market volatility and worsening headline risk, that technology “disruptors” prove their mettle. That’s because they defy the status-quo and introduce disruptive new technologies that create entirely new industries and products.

The stocks of quality disruptors tend to rise over the long haul, regardless of market conditions. The trick is finding the right ones.

With over 2,400 stocks listed on the New York Stock Exchange alone and about 4,000 tracked on NASDAQ, finding breakthrough technology stocks with huge potential can seem like finding a needle in a haystack. It requires time, effort and expertise to uncover the true diamond-in-the-rough gems offering exponential gains.

Which brings us to tech stock Netlist (OTC: NLST). This small company has been getting a lot of attention from investors who follow Silicon Valley up-and-comers.

Netlist designs, manufactures and sells memory devices that stand out for their innovation. Is Netlist poised for market-thumping gains? Or does it risk getting crushed by its large-cap rivals? Let’s find out.

In this edition of Investing Daily we will discover:

• Why are investors fascinated with Netlist?
• Should you buy Netlist?
• Should you sell Netlist?
• Overall forecast and outlook for Netlist.

Let’s get into it!

Who Is Netlist?

With a market cap of $50 million, data memory firm Netlist was founded in 2000 in Irvine, California and went public in 2006.

The company offers dual in-line memory modules (DIMM), which unify dynamic random access memory (DRAM) and NAND flash in plug-and-play devices that deliver terabyte storage capacities operating at nanosecond speeds.

Netlist has a long history of being the first to market with disruptive new products. The company specializes in hybrid memory that entails the merging of DRAM and NAND flash raw materials to create customized memory solutions. Netlist holds a portfolio of patents in the area of hybrid memory.

Netlist’s flagship products NVvault and EXPRESSvault allow users to accelerate data transfer in their servers and storage. HybriDIMM, Netlist’s next-generation memory product, facilitates real-time analytics in Big Data applications and high-performance computing.

Netlist’s customers are original equipment manufacturers who deploy the devices in servers, high performance computing, and telecommunications.

Simply put, Netlist gives end users the ability to store and transfer massive amounts of data at lightning speed.

How Has Netlist Stock Performed?

Netlist has significantly underperformed the broader market. Over the past 12 months, Netlist has lost 42.4% compared to a gain of 4.7% for the S&P 500. Over the past two years, Netlist has lost 70.3% compared to a gain of 23.8% for the S&P 500. Over the past five years, Netlist has lost 37.6% versus a gain of 49.6% for the S&P 500.

How Has Netlist Performed In 2017/2018?

In 2017, Netlist lost 68.6% vs. a 19.4% gain for the S&P 500. Year to date in 2018, Netlist has gained 3.8% vs. a gain of 0.2% for the S&P 500.

Who Are Netlist’s Rivals?

Netlist occupies a highly competitive space that’s dominated by large-cap rivals. Over the years, these large firms have acquired small entrepreneurial players as a means to pursue “innogration,” a term for the internal integration of innovation via strategic acquisitions.

Intel (NYSE: INTC)

Santa Clara, California-based Intel (market cap: $214.9 billion) offers microprocessors and chips that process system data and control other devices in a system. These products go into computers, flash drives, hard drives, servers, data systems, mobile phones and many other types of hardware. Intel provides advanced storage devices for every level of computing.

Western Digital (NSDQ: WDC)

San Jose, California based Western Digital (market cap: $13 billion) makes computer memory devices. Key products include hard disk drives and solid-state drives for a range of products, with an emphasis on cloud storage.The growing prevalence of virtual reality/augmented reality applications and 3D imaging are long-term tailwinds for WDC.

Skyworks Solutions (NSDQ: SWKS)

Woburn, Mass.-based Skyworks (market cap: $12.7 billion) is a major provider of electronic components and memory devices for a wide variety of high-profile industries, including the tablet computer, aerospace, medical device, mobile phone, new car and trucks, and home security sectors.

Will Netlist Go Up In 2019 (Should You Buy)?

The volatile technology sector has been a wild card lately, as skittish investors take profits from tech stocks that have enjoyed big run-ups. Tech stocks remain under pressure, but they face several tailwinds in 2019. That’s especially true for small-cap players that aren’t overvalued.

Small-cap stocks such as Netlist are closely tied to the U.S. economy and typically have less exposure to the global market. They’re safer plays when geopolitical turmoil, such as trade conflict, rears its head.

As customers take advantage of the mega trends of social, mobile, cloud and Big Data, it will become critical to store and analyze the vast amounts of data that do not fit into main memory.

The storage device market continues to boom. Smart sensors, robots, drones and humans are uploading staggering amounts of data every day, requiring ever-more storage.

You may not realize it, but there’s a hidden “traffic jam” building up in your living room.

Your TV, computer and smartphone are using far more Internet bandwidth than they did just a year ago and the statistics say that usage will multiply every year.

It’s a warm-up for the problem lurking just around the corner, because very soon everything—from your coffeepot to your watch—will be connected to the web.

Here’s what the numbers say:

• By the end of 2018, there will be over 20 billion web-connected devices, nearly triple the total of 7 billion in 2017.
• By the end of 2019, traffic from the Internet of Things (IOT) will match traffic from smartphones, tablets and PCs combined.
• By the end of 2020, the number of online devices will more than double again, to 50 billion.

Already, this trend has driven up Internet traffic by 700% in less than five years. And with what’s coming down the pipe, it could double almost overnight.

Instead of growing at the current rate of 9.5 times a year, Internet traffic could potentially grow 18 times a year, 260 times every two years and a mind-boggling 2,000 times every three years.

These trends put memory device makers in the “sweet spot.” Netlist and its aforementioned competitors are all striving to be an integral part of the IOT ecosystem.

The following video examines these trends in the data storage industry:

The consumer storage device market generated revenues of $14.25 billion in 2016 and is projected to reach revenues of $18.8 billion in 2025, at a constant annual growth rate of 3.3%.

The following chart (source: Statista) shows the global market revenue of consumer storage devices in 2016 and a forecast for 2025:

To leverage these trends, Netlist has been raising funds to boost its research and development efforts. Total cash on hand (most recent quarter) totaled $18.1 million.

Meanwhile, good news for Netlist occurred in September 2018, when the U.S. International Trade Commission issued a claim construction order in Netlist’s patent infringement case against rival SK Hynix (OTC: HXSCF). The ruling put the lawsuit on track for settlement under terms that are favorable for Netlist.

SK Hynix is a South Korean memory semiconductor supplier of dynamic random-access memory chips and flash memory chips. The case involves Hynix-made enterprise memory products that Netlist claims incorporate the latter’s proprietary technologies.

Will Netlist Go Down In 2019 (Should You Sell)?

I’ve just laid out for you the bull argument for Netlist. The bulls also think that Netlist is a value play. They should think again. A closer look at Netlist’s fundamentals reveals a value trap.

The company’s 12-month forward price-to-earnings (P/E) ratio stands at -9.25, which means the company has been losing money. Indeed, Netlist in recent quarters has reported negative earnings, a trend that shows no sign of reversing.

Netlist’s profit margin hovers at -48.1%; return on assets (12-month trailing) is -31.6%; and earnings before interest, taxes, depreciation and amortization (EBITDA) comes in at -$12.28 million.

For investors, these metrics are unacceptable and they significantly trail the averages of both the company’s industry and the S&P 500. Netlist is a story stock but behind the story are some ugly numbers.

Overall Netlist Forecast And Prediction For 2019

The average analyst consensus expects Netlist’s earnings per share (EPS) to come in at -0.15 cents in 2018 and -0.04 cents in 2019.

Netlist’s top competitors boast deep pockets and huge market valuations; they could easily leapfrog the tiny player with faster, better products.

A glimmer of hope for Netlist investors is the possibility of acquisition by a larger rival. Barring that outcome, though, you should put your money on Goliath, not David.

Netlist makes compelling products but it can’t seem to make a profit. Competition in the industry is likely to remain brutal, weighing on profit margins. NLST is a risky penny stock that prudent investors should avoid.

John Persinos is the managing editor of Investing Daily.