Finally a Bottom in NAND Pricing?

I have written before about SanDisk (SNDK) and have owned the stock several times over the years. Recently, the stock seems to have bottomed at about $20 and has now rebounded to over $30.

Today's strong move up was due to a bullish opinion on the company from Citigroup's Craig Ellis. He sees the stock hitting $35 based on tier-1 OEM customers poised to provide large orders, more products designing in ever greater quantities of flash (solid-state disk drives, for example) and a supply environment more conducive to firming prices.

Ellis could be right in his call. SanDisk reported earnings in mid-April that were less than expected but revenues that beat expections. Management pointed to tough pricing that kept margins under pressure.

So has NAND pricing finally hit bottom? Let's hope so. To show how serious the pricing pressure has been, the unit price of the benchmark 8Gb NAND flash chips for high-end handheld devices declined to $2.7 from $8 last September. Here is a quick survey of several sources that might shed some light on the subject.

First, we have a report today from DRAM Exchange. Here is the money quote: "demand for NAND Flash will improve as end product makers stock up in anticipation of 2H08 hot season. Because of the reduction and relatively conservative capital expenditures, we expect oversupply in 2Q08 will improve and reach a balanced condition in 3Q08. Subsequently, we expect NAND Flash price to stabilize and gradually rebound as the 2H08 demand increases."

Next we have a couple of reports from the Korea Times. The first one, from 3-27-08, supports our thesis that supply has stopped growing at a rate exceeding demand. The report states that Hynix Semiconductor, the world's No. 2 memory chip manufacturer after Samsung Electronics, said it will curtail its investment in chip production lines in the latter half of the year as unit prices of both memory and flash chips have fallen below the break-even point.

The second report from the Korea Times, posted 4-3-2008, pertains to Samsung. In this case, the manufacturer has said it has no intention of reducing output.

Finally, there was a report from InternetNews.com from 5-9-2008. The title of the post says it all: "Memory Prices Heading Up." The post quotes Nam Hyung Kim of iSuppli as saying that OEMs used inventory from mid-Q1 to mid-April, resulting in very few orders. This also reduced the amount of memory being ordered, which forced memory makers to cut back their manufacturing. "Price is going up because now is the time for OEMs to acquire more inventory," Kim said. "So we are detecting a lot of orders from OEMs that aren't just for now, but so they can build some inventory for the holiday season. Prices are pretty much at the bottom. If we expect prices to go up, then the best time to get it is now."

So once again, have we really seen the bottom in NAND flash pricing?

Despite Citi's Mr. Ellis, I can't agree that the answer is a clear cut "yes". Hynix has stopped investing in more capacity but, as far as I can tell, they have not actually reduced output of current manufacturing capability.

The good news is that demand appears to be increasing. Some of this is a seasonal effect as manufacturers ramp up for holiday sales. As Mr. Kim of iSuppli says "Flash demand is 85 to 90 percent consumer-driven, and consumer demand slowed down due to weak consumer confidence. NAND flash should be more sensitive to the economic conditions."

So we see that finally we are dependent on the stretched consumer to put a bottom in for the NAND industry by stepping up and purchasing electronic gadgets and PCs. This leads us to the question of whether the consumer has the ability to keep spending on non-essentials in the face of rising gasoline prices, falling housing values, a shaky job market, etc. That, I'm afraid, is a discussion for another time.

Disclosure: At time of writing, author has no position in SNDK