NAND Memory Fundamentals Improving

The recent tightening in the NAND (Flash) market and resulting rebound in pricing has been partly driven by inventory replenishment and yield issues at manufacturers, which raises the concern that pricing could be flattish or under downward pressure once the inventory replenishment is completed and/or yields improve.

Despite this “head-fake” risk, analysts expect any such risk to be temporary, as NAND industry fundamentals are indeed improving in 2nd quarter 2007 from a supply versus demand standpoint, and we continue to believe that NAND supply-demand will be balanced in 2nd half 2007. At these levels the upside potential on the stock exceeds downside risk.

There are fears that capacity is on the verge of being converted back from DRAM to NAND, so expect capacity conversions from NAND to DRAM to continue in 2nd quarter 2007. Based on analysis, do not expect conversions back to NAND to occur through 3rd quarter 2007, and to occur in 4th quarter 2007 at the earliest.

Global supply bit growth in 2nd quarter is clearly going to be limited and less then demand growth. In particular, Samsung and Hynix continue to be cautious about their NAND capacity expansion and expect their bit growth to be flat to slightly up in 2nd quarter. The expectation is for demand bit growth to be least 20% Quarter over Quarter in 2nd quarter.

The downside to Sandisk is limited and the upside is attractive, which makes it tradable albeit with risk.