Sandisk: Share Sprint to Slow, Expect Nervous Trading

The sprint of SanDisk Corporation (Nasdaq:SNDK) shares, which have risen 89% from their low in March, is set to stop, at least temporarily. On Friday, an Administrative Law Judge for the U.S. International Trade Commission [ITC] ruled, in an initial determination, that several flash memory products do not infringe all 5 of SanDisk’s patents, as the company claimed they did.

It should be made clear that the ruling did not apply to SanDisk’s royalties deal with Samsung to produce flash storage. That deal is the most important factor to SanDisk’s future, and is the subject of negotiations between the two companies.

The jump in share price at SanDisk is first and foremost a factor of the sharp jump in prices for flash memory. The other U.S. producer, Micron Technology Inc. (NYSE: MU) is up 70% since the middle of March. Halting old plants and an organized cut in production, combined with sharp increase in demand for flash memory from smartphone manufacturers, primarily Apple (Nasdaq: AAPL), led to price increases of tens of percentage points in recent months.

Last week, rumors originating from several sources abounded, saying that Apple ordered 100 million flash memory cards, primarily from Samsung, apparently. The orders were said to be ahead of the launch of the new 32 gigabyte iPhone in June. There were also rumors of an iPhone Nano, that is, a cheaper iPhone that will be sold in large quantities.

SanDisk will report its results on Tuesday, April 21. Expectations are for a poor first quarter, with a loss of $0.73 per share on quarterly sales of only $530 million, less than half of the record quarter it had after buying m-systems at the end of 2006.

Guidance for the second quarter will apparently be better than what the market expects today, because of the dramatic improvement of recent weeks in prices of flash memory products. However, SanDisk will still post a loss, of $0.50 per share according to market expectations.

SanDisk’s business model is such that when there will be a shortage of flash memory products, leading to a big rise in prices, at the same time that demand will return for multimedia-laden gadgets, SanDisk will quickly return to very high profit levels.

Until that happens, and as the calendar progresses toward August’s date to renew the Samsung agreement, SanDisk shares will trade very nervously, based on rumors about Samsung’s moves.

I believe that the double court processes arbitration and appeal which Samsung faced in 2008 regarding the cancellation of the agreement with msystems, in which Samsung ultimately lost, puts it in a position in which it has no alternative but to sign.

The only question that remains is what level of royalties will be agreed upon, because these are important msystems (now SanDisk) patents that Samsung uses, and Samsung will definitely jump at the new technology like x4, x3, and 3D.

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.