SanDisk: Analysts Disagree; JMP Sees Competition Rising

SanDisk (SNDK) shares are coming under pressure today after a week-long rally, as JMP Securities cut its rating on the stock and cautioned that competitive pressures in the flash memory sector are rising.

The JMP move is a reversal from recent bullish action in the stock. On Tuesday, the stock rallied on bullish comments from Citigroup’s Craig Ellis. Wednesday, the stock gained ground as memory chip stocks moved higher following comments from Applied Materials (AMAT) about memory sector cap ex reductions. And yesterday, the stock was upgraded to Buy from Hold by Needham’s Y. Edwin Mok.

Adding to the bullish sentiment, this morning UBS analyst Uche Orji raised his price target on the stock to $35 from $24, while maintaining a Neutral rating. In a research note, Orji writes that the higher target reflects “expected seasonal demand in Q2 and Q3 that offers ASP support,” as well as healthy bit growth, increased use of NAND in handsets and increased use of SSDs for premium notebooks and in enterprise storage. Nonetheless, he remains cautious on the stock due to “aggressive” supply growth in the industry.

By contrast, JMP Securities analyst Krishna Shankar today cut his rating on the stock to Market Underperform from Market Perform. He trimmed his 2008 pro forma EPS estiamte to $1.30 from $1.34, well below the Street consensus of $1.47. For ‘09, he goes to $1.64 from $1.67, again below the Street, which sees $1.87. He set a $25 price target on the stock, well below yesterday’s closing level of $33.10.

Shankar says his checks at retail and online stores “reveal a more crowded flash memory competitive environment” with high-end 2, 4 and 8 GB flash cards at lower prices from competitors Lexar/Micron, Kingston, PNY and Transcend. “While pricing has stabilized in anticipation of second half 2008 seasonality, Apple (AAPL) 3G iPhone flash demand and industry capacity cutbacks, we believe that SNDK may continue to lose unit market share at OEM and retail channels in the second half.” Shankar says the company’s forecast of 150%-170% bit growth may be too optimstic; he cut his forecast to 130%, from 149%.

Shankar also says that solid-state drives are unlikely to be a significant catalyst for the stock in the next 12 months; he says that the first generation notebook SSDs are “slow, unreliable and too expensive.” He also notes that the company has formidable competition in the segment from Samsung, Seagate (STX), Hitachi, Lexar, Intel (INTC), STEC and Smart Modular (SMOD).

Not least, he also thinks that Samsung is “likely to drive a hard bargain” in its renegotiation of its royalty renegotiation with the company. He contends the Street has not factored in the potential for SanDisk’s royalty income to be down 20%-30% in 2010. He sees the number dropping to $385 million in 2010 from $505 million in 2009 and $485 million in 2008. “SanDisk may be forced into litigation or have to negotiate less attractive royalty terms with Samsung, which has substantially improves its flash memory IP portfolio and ability to adopt home grown process technologies at the 32nm technology node and beyond.”

SNDK today is down $1.42, to $31.68.

Comments

[flaming bagof poo]

Every time I hear of SanDisk I can't help but think of those bozos on Wall Street Warriors who were pumping it to their clients at $55 (or thereabouts). I wonder if they're still employed?