How SanDisk Shares Rose - and Who Bought Apple's iPhones?

The past week was one in which all those who overcame their fear and heeded the advice of Wall Street's sages, "buy the fear," made a lot of money. They said the banks would record billions in losses and write-downs in the first quarter. They were proven right too, but financial stocks rose by 5.2% on average over last week, with giants such as Citigroup Inc. (C), and Merrill Lynch & Co. (MER) climbing more than 7%.

They said that SanDisk Corporation (SNDK) would miss the first quarter and lower its guidance for the second. They were also right to a certain degree here, since SanDisk sold more that it was expected to, but made less profit - and, to the surprise of many, its share actually gained almost 6% on Friday, bringing the total climb since the tough first quarter it just reported to more than 21%.

This may sound cynical, but SanDisk's CEO Dr. Eli Harari has finally discovered the magical formula that can send a stock climbing after results. Until now he beat the forecasts hands down nearly every quarter and nearly every time the share was battered down. This time round he missed the estimates and the share rose instead.

Unlike Google Inc. (GOOG), whose investors and analysts are mostly kept in the dark considering the company has a complex business difficult to both monitor and predict, SanDisk's predicament was known in advance, and endlessly highlighted by the analysts throughout the quarter. Covering SanDisk is fairly easy for the analysts since they can constantly monitor both flash prices on the sophisticated markets in the East and prices of end products at commercial chains.

This time round, however, precisely because all the bad news had already become common knowledge, investors, apparently fearing the worst - a quarterly loss - were pleasantly surprised when SanDisk reported a $48 million profit, and decided that the share had finally reached its floorboards.

Apple will beat the estimates

The quarterly round of results from NAND Flash companies is not yet through. Aside from Intel Corporation (INTC), and SanDisk, which have already unveiled their results, reports are due from two more gorillas plus one other manufacturer currently trying to stay afloat while continuing to hemorrhage losses. Samsung Electronics Co. Ltd. [KSX:5930] has a 40% market share. Toshiba (TOSBF.PK), the second largest player in the sector with a 34% share, (in partnership with SanDisk), and Korean manufacturer Hynix Semiconductor [KSX:00660] with 20%, are both due to report - this time on the same day - on Friday.

In its latest research note to investors, Goldman Sachs analysts recommend purchasing "Call" options on Samsung, since they believe its results will be better than expected thanks to strong sales of LCD screens, handsets, and a significant improvement in the memory chip market. They are also quite optimistic about Toshiba which they rate "Buy" and which they also recently added to their Conviction List Japan of select Japanese stocks.

Of the reports due to be published this week, Apple Inc. (AAPL) will focus the most interest, when it unveils its results. Also reporting will be two more companies on the verge of a merger but which will not arouse much interest - Yahoo Inc. (YHOO) and Microsoft Corp. (MSFT), which will follow on Thursday.

As for Apple, approaching the reporting day with its share price in excess of $160 will make a big difference, considering that it was at $115 just two months ago in the middle of the quarter which many people felt was catastrophic. The expectations of Apple have risen considerably in recent weeks, and therefore I do not believe that we are likely to see a repeat of the "Google" effect here, a 20% climb in price after reporting, even if Apple does beat the estimates, which it will.

Apple will beat the analysts' estimates because, among other things, all the troubles that the aforementioned flash companies, NAND and DRAM alike, have been facing in recent months are great news for the company, given that prices of memory chips for its computers and gadgets were so low in the quarter. (Low in terms of production costs and even less than that at some manufacturers). This factor caused its gross profit for the quarter to be substantially more than its own guidance three months back.

Apple computers, including the new wafer thin notebook, sold well in the quarter while its players were weaker, but it is the company's big hit, the iPhone, whose prospects are as yet unknown. While the whole world knows that Apple is set to launch the next generation of the iPhone this June, many potential users have been unable to hold back. iPhone handsets, including those with a storage capacity of less than 8Gb, have been sold out, at least at stores in New York.

Even an attempt to buy a new iPhone handset on eBay (EBAY) is possible only at prices far higher than those listed on Apple's website, and this is odd, since one can safely assume that eBay will be flooded with sellers eager to offload their old models once the new generation of iPhone goes on the market in the next few months. Official supply times at Apple itself have been extended to a week, with the customer required to subscribe to the local telephone company (in this case AT&T (T)), which means foreigners can't buy them. Whether joke, or truth, according to Apple vendors in Manhattan, the entourage of clerics accompanying Pope Benedict XVI during his tour of New York cleaned them out of all their supply of handsets.

Citi rates Apple "Buy" with a target price of $212, and has raised its estimates for the March quarter. As for the June quarter, it expects Apple CEO Steve Jobs to maintain his tradition of erring on the side of caution in his guidance to make the waiting easier. It is therefore expecting guidance of zero growth for the quarter ending June, lower gross profit because of higher prices for flash memories, and lower earnings per share.

I advise anyone who still doesn't have Apple shares to take advantage of any sell-offs this week or in future weeks, since the share is set to skyrocket to new historical highs later this year following the launch of the next version of iPhone in the summer and the subsequent signing of agreements with telephony companies across the globe. Once this is complete, Apple will find itself with an almost infinite market in the smart handset sector, compared with the small share it holds today.

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.