Last Thursday, SanDisk Corporation (SNDK) published its financials after trading. This stock accounts for a sizable proportion of my portfolio, partly as an inheritance from M-Systems, but principally because I believe its price will reach three digits during 2008. Its results contained both good news and bad. The good news was that the company will significantly increase its revenue from royalties this year and in the coming years. The bad news was that it will take another quarter or two for the company to recover from the recent collapse in NAND prices.
SanDisk has been pushing ahead with the break-up of what was once M-Systems. After the bombshell of the previous quarter, in which it announced that it was shutting down M-Systems' largest revenue source, the Disk-on-Key [DOK] product line for OEM customers, it has now announced that it will be winding up the joint venture with Toshiba for the sharing of profits on sales of MDOC mobile chips to leading handset manufacturers. This is a logical move, since in contrast to the small M-Systems, SanDisk is large enough to sell directly to Nokia Corp. (NYSE:NOK) and others, and it has no need for Toshiba's platform.
As I see it, SanDisk's stock could reach a three digit price by 2008, thanks to two processes that will get underway this summer and which will gather momentum towards the end of year and continue into 2008, unless the whole world enters a severe recession. As far as demand for NAND chips goes, we are on the verge of a quantum leap for the first time since the summer of 2005, as a result of new launches of advanced handsets such as the iPhone and its many imitators, music and, even more so, video players, flash-based hard drives, computer game platforms, and other new applications that appear daily, all of which are due to plummeting flash prices. Even the cable companies' VOD servers will now store films on flash.
As for supplies of NAND chips, SanDisk's CEO Dr. Eli Harari explained in last week's conference call that although everyone is currently talking about a surplus, the global market could soon find itself with a severe and prolonged shortage. He explained that there are presently many old fabs that are producing 200mm wafers, and the need to bring down production geometrics in order to remain competitive will make these fabs irrelevant during the next two years.
Save for the SanDisk/Toshiba partnership, which will ratchet up the monthly output of its new Fab 3 to 150,000 chips by the year's end, and which in September will dedicate another massive foundry, Fab 4, which will start to contribute next year, there are virtually no mega NAND factories even on the drawing board anywhere. The new launches, coupled with the increase in demand due to the Olympic Games in Beijing in the summer of 2008, followed by the U.S. elections in the autumn, are likely, Harari believes, to accelerate the onset of a chip shortfall - something that will be a nightmare for electronics companies like Apple Inc. (NASDAQ:AAPL).
Should such a shortfall and rationing come to pass, SanDisk will profit twice over. It will benefit as an electronics company that produces its own chips and is not dependent on the chip manufacturers, and it also stands to gain once its net profit grows dramatically after chip prices skyrocket. Once that happens, more royalties will flow from Samsung, Hynix, and others directly into SanDisk's profit line. As mentioned earlier, an optimistic scenario like this can only go wrong if the entire world enters a recession so severe that there won't be any significant growth in sales of advanced handsets or digital cameras - two prominent examples of flash chip/card-guzzling applications - not even in the year of the Olympic Games itself.
SNDK 1-yr chart:
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.