Netlist Transforms With High-Margin Bet

IRVINE, Calif. (TheStreet) -- Netlist (NLST) shares have rallied an astonishing 670% over the last three months on the back of a product it hasn't even sold yet.

Netlist, which makes online memory subsystems, has become one of the early tech stars in this young new year. A recent pullback in the company's shares, though, has shone a light on the pitfalls of being a penny stock. Netlist has little institutional ownership and no analyst coverage, and a long string of quarterly losses and brutal competition from rivals, including STEC(STEC) and Smart Modular(SMOD), may give some investors pause.

But even without yet recognizing a single sale from its new HyperCloud memory module, Netlist's high-margin bet has put it back on traders' radars. Netlist CEO Chuck Hong and believers in Netlist are making the bet that HyperCloud will help complete the company's transformation from embattled commodity memory maker to an innovative powerhouse.

Netlist CEO Chuck Hong.

Netlist has been a publicly traded company for just over three years. In November 2006, the company priced its initial public offering of 6.25 million shares at $7, and its stable of customers including Dell (DELL), IBM (IBM) and Hewlett-Packard (HPQ) attracted plenty of early interest. Enthusiasm for the IPO pushed the stock north of $11 a share, but the pinch of the recession and industry-wide weakness for memory makers took a heavy toll on its share price. In March 2009, one share of Netlist could be had for a mere 11 cents.

"Last year, it was obviously a difficult period for IT companies," Hong said in an interview with TheStreet.com. "Over the last three years, the memory industry lost billions of dollars. Outside of the automotive industry, memory was probably the worst industry worldwide. If you're dealing with commodities in that environment, you're going to lose your shirt."

>> Read the entire interview with Netlist CEO Chuck Hong

But November marked a turning point for Netlist, as fortunes changed for both the company and its ardent shareholders. HyperCloud, which Netlist has dubbed as the "world's first 16-gigabyte, 2 virtual rank memory module," has been the catalyst of the stock's sharp ascent.