The Flash-makers' Conundrum (SanDisk, SNDK)

| About: Western Digital (WDC)

Yesterday we suggested that market sentiment had swung too dramatically in favor of flash memory as opposed to hard drives, writes The Stalwart. The New York Times exposes another interesting wrinkle--the iPod Nano could simultaneously push the costs of making Flash memory up, while pushing retail costs down, leaving flashmakers in an unfortunate situation:

Manufacturers' prices are starting to rise even though historically the price of flash memory has fallen about 40 percent a year. Don Barnetson, Samsung Semiconductor's associate director of marketing for flash memory, said, "We are extremely constrained." The outlook for consumers, conversely, is that prices will continue to fall for U.S.B. flash drives, memory cards and MP3 players. That is partly because of the iPod Nano. Like its earlier incarnation, the iPod Shuffle, the Nano can be used like a U.S.B. flash drive to move an Excel file or a PowerPoint demonstration from one computer to another.

Consumers who know that may choose to forgo buying the generic fob for the Nano. "A four-gigabyte flash drive isn't stylish and trendy, and you can't use it to play music," said Joe Unsworth, a senior analyst at Gartner, the technology research firm.

A result, Mr. Unsworth said, is a sudden drop in the retail price of two- and four-gigabyte flash drives. Those devices had been going for around $300 for the four-gigabyte, but now must undercut the Nano or risk losing sales to it. (Emphasis Added)

We use shares in Sandisk (NASD: SNDK) as a proxy for measuring "Flash mania" precisely because they're only tangentially related to the iPod's goings on and thus a good measure of how desperate investors are to buy anything with "Flash" in it's business description. That they rose so dramatically after the Nano news, when it fact hey could get hurt by it, suggests that flash is loved to much, and probably hard drives too little.