What Triggered The Storm That Sent SanDisk Plummeting?

Wall Street history shows that, contrary to what people think, September, not October, is the worst month of all. October, nevertheless, has a most daunting reputation of its own, since it was in this month that the two massive crashes in 1929 and in 1987 took place. Last Friday, October bared its teeth yet again, and the experts have once again been warning us of a black Monday looming large on the horizon.

Speaking of 1929, I had occasion in the 1970s to meet a retired investor who was active at the time of that crisis. He made a casual reference to 1929 as we stepped out of the New York restaurant we had been dining in. As he was already over 80, and knowing that he had an estimated fortune of several million dollars, I escorted him out into the street and hailed a cab for him. "What are you doing?" he asked. "Hailing a cab for you," I answered. "Anyone who was really hungry for bread in the depression that followed the 1929 crash, didn't take a cab if he could go a few stops by bus," he replied.

Check Point Software Technologies Ltd. (CHKP) was one of the first Israeli companies to unveil its results at the start of the reporting season. Company founder and CEO Gil Shwed has had good reason to smile, not just because of his company's strong results, but also because of the two million options he received just six weeks ago, at the price of the day of the shareholders' meeting. This means he has already made a whopping profit on paper of more than $4 million. As I see it, in the wake of the various options scandals with demands for greater transparency in reporting, an options allocation as large as this should only have been given at the end of the quarter and following the publication of the company's report.

Of the part-Israeli companies, SanDisk Corporation (SNDK) reported on Thursday. It could be said of the results it unveiled that "the surgery was a success but the patient didn't make it," since it really hurt to see SanDisk crash by more than 15% on Friday, after it had well and truly beaten all the preliminary forecasts, and provided reasonable short-term guidance and tremendous optimism about the medium and long-term, but none of this helped.

SanDisk shed 3.5% in late trading on Thursday, once all the information disclosed in the conference call had become common knowledge, but on Friday it found itself in the middle of a "total storm" which devastated it. The crash was caused by three things that happened simultaneously. The entire market collapsed, there were options that expired that day, and several comments were made during the course of the conference call, aside from the results and guidance, which somewhat startled investors. More importantly, these comments gave the big short traders the ammunition they needed to go on the kind of offensive that only giant sophisticated hedge funds are capable of. The massive turnover of more than $2 billion, 20% of the company, proves this.

As I wrote on a previous occasion, investors see SanDisk as a chip stock in a commodities field, rather than an innovative electronics company, and as current market expectations talk of a certain degree of risk that the NAND market could once again experience an oversupply and a sharp fall in prices in the coming months, investors have "taken to the hills."

When he spoke at the company's conference call, SanDisk's CEO, Dr. Eli Harari explained repeatedly that he could not accurately predict the extent of the fall in prices in the short-term and whether this would be higher or lower than the level at which SanDisk's gross profit could be badly hit. But after being pressed on the subject repeatedly towards the end of the conference call, he made a statement that sealed the fate of the company's share since the long-term is of no interest to anyone on Wall Street.

"I've said it many times; let me say it again," Harari began. "We believe that our markets are very young and have really tremendous growth opportunities for us over the next three to five years. We worry a great deal about what will happen in December or in January or by the first quarter and we manage the business as best we can through these difficult quarters." Armed with this statement, the hedge funds went on the warpath on Friday hammering SanDisk, which lost $1.5 billion in market cap.

SanDisk's key market now is the one for drop-in and fixed flash cards for cellular handsets, a market that has seen rapid growth, especially in Asia. Worthy of note among the major markets just around the corner that Harari mentioned as having long-term potential, are flash storage solutions for computer applications, which he believes will, by 2010 or 2011, "become the second largest user of Flash memory after mobile handsets." Harari believes that SanDisk is well placed to become one of the leaders in this field, because of its know how and production capacity.

Notwithstanding all this, yesterday SanDisk fell back on one of the inventions created by M-Systems, and reiterated its never ending hope that it will be viewed as a competitor with Apple Inc. (AAPL). It unveiled TakeTV, a special USB drive which people can use to download video content and view it on television sets at home or anywhere else. At the same time, it also announced the beta version of FanFare, a web-based platform where for a fee, consumers can download television shows, movies and other video content. The platform will initially offer films produced by CBS among others. Apple, it will be recalled, offers the AppleTV set-top box, and the iTunes web site, for the same purpose and the same target group.

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.