As Tech Claims Near Zero Visibility, Is the Flash Memory Market Rebounding Already?

The headlines in the U.S. last Friday were awash with grim employment figures, the likes of which, it was alleged, had not been seen since December 1974. I suggest checking what actually went on back then. I remember that month only too well. My generation was just returning from the extended tour of reserve military service that the Yom Kippur War had imposed on us, and wasted no time in heading overseas.

We dreamed of spending our days kicking up our heels in metropolises across the globe, loitering under emblazoned neon street signs on the streets of Paris, London, and New York. So it came as somewhat of shock to us to find all that these cities had been brought to a darkened standstill by the energy crisis caused by soaring oil prices that spread panic far and wide, triggering a biting recession. But anyone who takes the trouble to look at the figures will find that 1975 was actually one of the best years ever on equities markets, with the S&P 500 gaining 32% while the Dow Jones climbed 38% over the year.

Earnings warnings ahead

Hard on the heels of the grim macroeconomic data published last week will be a string of profit warnings for the fourth quarter of 2008 and the first quarter of 2009 as the month and year draw to a close. "This is a tough time, with near zero visibility," was the conclusion of most of the managers of technology companies attending last week's Credit Suisse conference in Phoenix Arizona.

The chip market is bracing itself for a fall of 12% on average in fourth quarter sales, but the Credit Suisse analysts were even more pessimistic after the conference, and with several profit warnings already released, they are expecting the quarterly decline to reach 20%.

As for the companies at the conference, Dell Inc. (Nasdaq: DELL) founder and CEO Michael Dell said that while demand had stabilized following the dramatic slump in demand for computers in mid-September, visibility for early 2009, beyond the festive shopping season now in full swing, and seasonal demand as a result of end-of-year spending by enterprises, was very limited. Incidentally, the analysts are expecting Intel Corporation (Nasdaq: INTC), which has already issued one warning for the third quarter a few weeks back, to issue another for the fourth, and on Monday the company downgraded its estimates for it accordingly.

Michael Capellas, CEO of transaction processing software company First Data, taken private in September 2007, which handles the processing of 40% of all credit card purchases in the U.S., told the Credit Suisse conference that "Black Friday" sales were actually up 11% over last year. Cisco Systems Inc. (Nasdaq: CSCO) CEO John Chambers reiterated his belief that his company would return to annual growth of 12-17% but that he had not the faintest idea when this would happen, since his visibility for 2009 is zero too, and he could not say when the crisis was likely to end.

Flash awakening

Investors in SanDisk Corporation (Nasdaq:SNDK) will have been closely following Monday's analyst day in San Francisco by Samsung Electronics Co. Ltd. (KSX:5930), in the wake of its abandoned takeover bid for SanDisk. Samsung's fellow Korean memory maker, Hynix Semiconductor (KSX:00660) announced it would be making drastic cuts in spending and investment, and would also be raising emergency funding from its shareholders, a consortium of Korean banks.

Samsung confirmed earlier predictions on the market in its analyst day, saying it would be very conservative with its budget for new plants and equipment next year, after spending about 10 trillion won ($6.9 billion) in 2008. Intel is likely to follow suit in the near future by announcing the shut down of the joint flash memory production line it has been operating together with Micron Technology (NYSE:MU), on which it has been incurring losses every quarter.

The marked reduction in flash memory inventories, coupled with greater demand, as prices for all flash-guzzling devices tumble, could bring about the end of the crisis in the flash sector sooner than was thought, and, at a later stage, send prices soaring again as the recession lifts. Among the new products currently on the market and which could jump start demand for flash memories are netbooks - small laptops that are designed for wireless communication and access to the Internet, most of which are powered by Intel's new family of Atom processors, and nearly all of which come with the option of drop-in solid state flash drives at reasonable prices.

The flash market had pinned loads of hopes on the iPhone production lines of Apple Inc. (Nasdaq: AAPL) and the similar models that its competitors have been quick to develop in its wake, but the oversupply of flash memories was so large, not even the iPhone revolution made any difference. Last Friday, and then again yesterday, rumors were circulated that Apple was on the verge of launching a cut price model of the iPhone for $99, with a 4Gb flash memory, instead of the current 8Gb and 16Gb models. According to the rumor, the handset will go on sale at the world's largest retail chain Wal-Mart Stores Inc. (NYSE: WMT). If this happens, it will represent a move in the right direction for the flash market, and could be beneficial, albeit indirectly, for companies like SanDisk.

Disclosure: None

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[Ames Tiedeman:]

When Flash turns SNDK out performs. Be ready. This name has not been trading at this valuation in years.

2008 Dec 13 05:47 PM