In this weekend's Barron's (sub. req.), Bill Alpert opines that Micron's (MU) acquisition of Lexar (LEXR) spells trouble for flash memory retail leader SanDisk (SNDK). Here are Alpert's three main points:
● Chips from the Micron-Intel joint venture will reduce Lexar's raw NAND costs and allay any fears of supply constraint -- a constant challenge in this field.
● Micron's low gross margins vs. SanDisk's (20 vs. 35.5) give Micron leverage to pressure SanDisk while still growing market share.
● Even after its recent stock price fall, SanDisk is richly valued -- at 22x 2006 earnings, or 26x if one considers stock options.
It's reasonable to extend Alpert's first two points to other flash memory producers as well -- in particular, M-Systems (FLSH), which has struggled both to remain competitive on gross margins and to secure sufficient NAND supply.
But here's where the development might actually work in M-Systems' favor: Intel/Micron's raw NAND competitors Samsung and Hynix (M-Systems suppliers) might need to lower their pricing to compete with the synergies at Intel/Micron/Lexar. That would be good news on the supply chain for FLSH.
SNDK 1-yr chart: