SNDK
By Mark Boslet Of DOW JONES NEWSWIRES (This article was originally published Thursday)
PALO ALTO, Calif. (Dow Jones)--SanDisk Corp.'s (SNDK) shares have been beaten down, but Wall Street appears to be looking beyond the bruises and welts.
In the past five months, the volatile stock has tumbled 36%, tracking the sinking price of the NAND flash memory chips the company makes for MP3 music players and digital cameras. Over the last two weeks, however, the shares have risen from an intraday 52-week low of $35.82 to $40.90.
The tentative recovery comes as NAND chip pricing shows signs of stabilizing. Investors also are excited about promising new uses for NAND memory - replacing the disk drives inside laptop computers and providing the memory for Apple Inc.'s (AAPL) new iPhone.
"At under $40 (a share), I think that SanDisk has bottomed out," asserts Ruben Roy, an analyst at Pacific Crest Securities. With a price-to-earnings ratio of 41, compared with 22 for Intel and 18 for Micron, the stock is not inexpensive. But news about the company should be more positive than earlier in the year, Roy says.
Indeed, SanDisk is a company with lots of potential. The low-cost producer in a rapidly growing $12 billion market, the Milpitas, Calif., high-tech firm is riding the wave of digitalization around the world. Music players, such as Apple's iPod, are hot products as people download digital music over the Internet. Flash cards for digital cameras sold better than expected last year, and sales of similar slide-in cards for cellphones are growing smartly.
SanDisk shows no signs of slowing the expansion of its manufacturing plants despite the industry-wide overproduction that led prices down roughly 50% since early December. To adjust to the declines, the company cut prices of its retail and OEM products, trimmed its work force by up to 10% and reduced salaries for executives.
Now with the market looking more stable, better times could be ahead. "We have seen signs of prices leveling out in the last week," says Judy Bruner, SanDisk's chief financial officer. "Perhaps by the second half of the year, the market could be in an under-supply situation."
Some analysts say they noticed stable prices for NAND chips since early February, when 8 gigabit chips leveled out at just under $5 a piece, down from more than $7 in December. Overall NAND flash prices could be down 67% for the year, says Alan Niebel, chief executive of the research firm Web-Feet Research of Monterey, Calif., but most of the decline may have taken place already.
The stability, if it lasts, would be good news for SanDisk and other memory producers, such as Samsung Electronics Co. (005930.SE), Micron Technology Inc. (MU), Intel Corp. (INTC) and Hynix Semiconductor Inc. (000660.SE). Anticipating an improved environment, UBS analyst Alex Gauna on Tuesday lifted his rating on SanDisk to buy from neutral.
"I kind of doubt we'll see sharp (price) declines in the next several months" similar to the ones the industry saw in December and January, says Michael Sadler, a vice president at Micron. Yet, "we continue to be in a state of oversupply," and Micron is shifting modest amounts of NAND production to another kind of memory - DRAMs - at its Manassas, Va., plant and to CMOS sensors, chips that measure the intensity of light, at its Idaho fab, Sadler says.
SanDisk's decision to keep its foot on the manufacturing pedal, despite the oversupply, appears to make sense for the company. Executives say demand for NAND in their USB storage drives, MP3 players and other products continues to outstrip their ability to make the chips. Demand should be up more than 170% this year, not far from the extraordinary 221% rise in 2006, they say.
One piece of positive news for SanDisk is the interest computer makers have shown in using NAND-based memory in notebooks. The price declines this year make NAND a more attractive alternative to the still lower cost disk drives installed today.
Greg Rhine, senior vice president at SanDisk, says industry projections forecasting that 1 million to 2 million notebooks will sell this year with NAND flash are reasonable. Sales should jump from there. By 2010, as many as 30 million notebooks could be made with NAND, or about 15% of the market.
The price drop is "driving a lot more applications into the market sooner than they would have been" expected, explains Shawn Sackman, director of marketing at Intel. "A while back I would have said 2008" for NAND flash in personal computers. "Now I would say the second half of 2007," says Sackman.
Still, some analysts suggest caution. "I think 2007 and 2008 will be educational years" for the NAND computer market, says Joe Unsworth, a principal analyst at research firm Gartner Inc. Volumes won't rise until after that, but even then, cost differences could remain significant. By 2010, Unsworth estimates, a 400 GB disk drive will cost the same as a 48 GB NAND drive, largely limiting the selection of flash chips to ultra portable machines where its compact size is worth the price.
To be competitive in the broader notebook market, the price of NAND needs to drop further - both a boon and a bane for the industry. Each price decline increases the attractiveness of NAND flash. But it also puts pressure on profits and margins.
To some, the recent ascent in SanDisk shares may be premature. The company could have several more difficult months before sales surge with the back-to-school and end-of-year holiday seasons.
"We think pricing will be under continued pressure for the first half of the year," says Unsworth. "I think it will go lower over the next couple months."
(Mark Boslet is a special writer covering technology for Dow Jones Newswires.)
