Saifun Investors Should Have Seen the Warning Signs

| About: SouFun Holdings (SFUN)

Saifun Semiconductors Ltd. (Nasdaq:SFUN) has suffered a pretty heavy blow with the announcement by its most significant customer, Infineon Technologies (NYSE: IFX) digital memory division Qimonda AG of Germany, that it was canceling a large OEM contract. Up to the time of the announcement, Wall Street experts were unanimous in their view that Saifun was the biggest technology story of the future since Qualcomm Inc. (Nasdaq: QCOM). All the analysts and experts said the same thing, and investors, very few of whom actually understood what Saifun does, were convinced by the erudite experts to believe it too.

Yet someone, after all, did realize that Saifun had a problem, and the fact is that, despite the analysts and the lay investors who listened to them, Saifun’s stock only managed to climb very briefly. Overall, Saifun’s stock has been continuously heading south throughout its first year on the stock market. But all the experts claimed that it was only a matter of time until it made the turnaround. Even when the company posted disappointing second quarter sales, the headlines read “Saifun beats the forecasts” since it beat the consensus estimates for its bottom line, despite the surprising fall in sales.

No one bothered to find out why, but I did ask a semiconductor expert what lay behind this and he said it was a just a temporary matter. Even the fact that 60% of Saifun’s sales were to Qimonda was viewed as an interim problem but not a serious one. The surprising thing here is that all of us, experts included of course, had a similar experience with Orckit Communications (Nasdaq: ORCT) but for some reason, no one saw the connection between the two cases.

As I have said repeatedly on previous occasions, the big problem with Israeli industry in general, and the high-tech sector in particular, is its near total dependence on companies positioned between them and the consumer, at differing distances. Saifun was never any different from any other company, yet according to all the analysts and commentators, both Israeli and foreign, it was set to become the next jewel in the crown. Because of this, they ignored the obvious danger, and chose instead to justify their total enthusiasm by pointing out Infineon’s selection of Saifun’s technology and, more recently, also that of SanDisk Corporation (Nasdaq: SNDK).

This brings me back to the recent developments and their effect on investors. After all, it was common knowledge that 60% of Saifun’s sales were to Qimonda. It was also no secret that, despite having the might of Qimonda and Infineon behind it, Saifun’s NROM technology only managed to take 1.4% of this specific market, whereas a company the likes of Hynix Semiconductor of Korea, managed to sell $1.48 billion worth of NAND chips.

As far as Main Street is concerned, the risks in Saifun were similar to those of Orckit and perhaps even greater. However, in cases such as Saifun and Orckit, investors get their information from two sources - analysts and experts on the one hand, and the company on the other. Since the experts and company management both gave convincing explanations as to why Saifun’s breakthrough on the stock market was only a matter of time, investors felt reassured. Only recently, Saifun’s founder made some derisive comments about his rivals’ inability to understand, in a display of the Israeli arrogance we know so well.

Therefore, what happened on Wall Street was simple: lay investors, you and I, who don’t have a clue about how Saifun’s technology works and how big its market is, went out and bought Saifun shares because “this was supposed to be a success on the scale of at least M-Systems Flash Disk Pioneers (Nasdaq: FLSH), if not bigger.” Those who understood the technology and the market Saifun was targeting, sold us the stock willingly because they understood that Wall Street doesn’t understand a thing. After all, M-Systems CEO and president Dov Moran had the opportunity to become one of Saifun’s partners and decided to pass. Why didn’t anyone ask why? Why didn’t any of the analysts ask why? Moran did not join Saifun not because he didn’t believe in the genius of its team, nor because the technology was inferior. He didn’t join because he is a market man, and he probably wasn’t sure that the market would adopt the technology. It appears that he was right.

The claim now, mainly from Saifun, is that the market does not sufficiently appreciate the greatness of this NROM technology. “This is a loss of a significant customer for us,” CFO Saifun Igal Shani told Reuters, “But nothing has changed in what we need to do; we have to have success with existing customers and get on board new customers. There are many opportunities for us.”

This may or may not be the case, but I wouldn’t touch the stock, since the burden of proof of the success Shani talks about is on Saifun alone, and without Infineon this does not look an easy task. It certainly won’t be business as usual as Shani claims. Saifun’s management would do well to take a trip to Ramat Gan and consult their counterparts at Orckit who are slightly more experienced when it comes to losing customers of this kind and especially when the customer, and not the supplier, is the one who has decided to call it a day.

Lastly, one lighthearted aspect of this painful affair is the Israeli self-adulation, the ego and absolute belief that the world around us depends on us and without us nothing will move. Apparently, not one analyst downgraded or upgraded his or her rating for Infineon or Qimonda, and not a single commentator voiced concern about the future of either company. Both stocks did not respond at all to the bombshell announcement from Saifun.

As far as they are concerned the issue is completely marginal. “We tried out NROM for two years and apparently the market isn’t going for it,” explained Qimonda to technology news site EE Times. They consider it an experiment that failed, period. So please, let’s get this back into proportion. True, Saifun has fantastic technology and plenty of geniuses, but what can you do when it’s the market that sets the rules? This is an old and well-known Israeli problem. If you ask me Saifun is presently a dead cat and I only hope that it has nine lives that it can fall back on.

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