Jury Still Out on Intel's Flash Adventure

Over the next two days, Intel Corporation (INTC) will hold its annual spring meeting with analysts. This event is critical for the share and the tech sector in general, since unlike the presentation Cisco Systems Inc. (CSCO) is giving, and the one Apple (AAPL) gave last week, Intel will specifically address the state of its business in the first quarter, and it could even revise downwards the guidance it gave in January, when it unveiled its results for the fourth quarter of 2007. Goldman Sachs believes that Intel will not lower its guidance this week since the quarter has another month to run, and it is known that the sales in the final month of any quarter are far higher than in either the first two months.

Aside from this, Intel's managers will face a tough grilling by analysts on one field that has been exasperating investors, and that is the flash chip sector. The company looks set to announce tomorrow that it will be winding up the NOR flash business that has caused it substantial losses over the past decade.

The exit will be made in the form of the setting up of a company together with European chip giant STMicroelectronics NV (STM), with financing from a private fund. Intel's longstanding flash fab at Kiryat Gat and its many employees will be among the many businesses that will be transferred to the ownership of the new company.

For Intel's investors, one goat may now be leaving the pen, but a new one, NAND flash, through a partnership with Micron Technology (MU), entered in its place last year. This partnership had already blighted Intel's results by the fourth quarter, and was one of the triggers behind the stock's subsequent collapse.

The Intel/Micron learning curve will claim yet more losses in the coming quarters, since in addition to the technological problems inherent in the competitive flash manufacturing sector, flash prices have fallen through the floor, and one only need look at SanDisk Corporation (SNDK), whose share is currently trailing at a three-year low, to see how acute the slump actually is.

Intel's managers will have to explain why they are making yet another foray into flash, just as the processor sector is seeing a rebound, and after having sold off a substantial chunk of loss-making businesses, most notable of which was the sale of its handset processor division to Marvell Technology Group (MRVL). If the company was already going back in, investors will ask, shouldn't it have done its homework first and timed its entry accordingly? Intel made its entry in the fall of 2006, just as NAND prices were beginning to plummet, and both it and Micron have incurred heavy losses ever since. "A badly-timed entry," was how the Micron CEO himself described it a year ago.

One player too many

One person who publicly expressed his exasperation at Intel's moves in flash, is Dr. Eli Harari, CEO of rival manufacturer SanDisk. Last week at the analysts' day he asked, "If you want to know the time why buy a watch?". He meant that if Intel has that much faith in the future of NAND flash-based products such as, for example, Solid State Drives for the notebooks it wishes to sell in future, it should not have invested in flash production lines of its own, but bought them from existing manufacturers.

Intel's entry to the market was, for Harari, one player too many, whose entry devastated prices last year, due the surplus of chips that landed in a market where demand had yet to take off. The dire state of the market, in which Samsung and Toshiba (TOSBF.PK)/SanDisk are barely managing to produce without chalking up losses, did not stop Harari from issuing an aggressive forecast last week of yet more joint production lines with Toshiba over the next three years.

Harari made us understand that the difficulties over the short-term did not amount to a strategic threat that would bring about a drastic change in his plans, and that he sees enormous potential for flash products, especially those for the handset sector, and the SSD business, as well, at a later stage. He apparently believes that by 2010, one of the weaker players in the flash manufacturing sector - either Hynix Semiconductor (KSX:00660) or Intel/Micron will be forced to throw in the towel and quit, so it will be interesting to hear what Intel has to say about this today or tomorrow.

According to current estimates, by 2011, demand - in terms of byte consumption in all gadgets, computers and handsets - will be doubling year-on-year so it is not entirely inconceivable that the flash market could abruptly experience an acute shortage with rocketing prices. Harari said, in jest, that this could happen suddenly, "and not just as a result of an event such as a fire at Samsung's production lines," like the one last summer, which set off a panic lasting several days, and sent prices soaring.

For those who may not recall, SanDisk's share rose from $20 in the summer of 2005 to $80 at the start of 2006, a climb that earned the description "the iPod Nano effect," because of Apple's unexpected switch to flash-based players, causing a huge chip shortfall. Intel, it is claimed, apparently entered the field because it was just as confident as Harari himself that the "SSD effect", once it hits the computing field a few years hence, would be so phenomenal that the "iPod effect" would pale in significance by comparison.

Intel, as a potential leader in SSD production, does not wish to find itself at the mercy of flash manufacturers, so it made an early entry into the field at the end of 2006. Apple, for example, as a major buyer of flash chips for iPods, and iPhones, has benefited greatly from low flash prices, but I can imagine what will happen the day there is a shortage - it will be in such a panic that Steve Jobs could well make SanDisk an offer it cannot refuse.

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.