Sandisk: Will Samsung Help or Will Intel Hurt?

It's not clear what has been happening lately at SanDisk Corporation (SNDK). It fell 27% in the past month, and by yesterday it had tumbled to $24 from its mid-May price of $33. "Barron's" magazine said Goldman Sachs strategist Abby Joseph Cohen listed SanDisk as one of her picks in Barron's mid-year analyst round-table. One can only wonder whether she knows something that we don't.

The erratic swings in SanDisk's share in recent weeks, from $20 to $33 and then down to $24 again, is most interesting, given that there have been no reports of any dramatic changes in flash prices or in the state of its target markets that would justify volatility like this. The flash chip market has been suffering from oversupply and falling prices since the beginning of the year, and this is likely to continue until the end of the third quarter at the earliest. SanDisk's target markets in the US are fairly weak, but those in Europe and the East are far stronger, and there is unlikely to be any immediate change in this either.

It is my belief that there are two dramatic developments now unfolding behind the scenes which, once they surface in official announcements, will trigger an emphatic shift in SanDisk's share price in either direction, and these are behind the recent nervousness. The first and most important of the two, at least according to Goldman Sachs' analysts, is the extension of the royalties agreement with Samsung Electronics Co. Ltd. (KSX:5930).

Of the $35 target price that Goldman Sachs gives SanDisk in its "Buy" rating, the analysts attribute $25 to the royalties it receives, so it is clear what will happen to the share if and when an announcement is made confirming the signing of, or the failure to sign, a deal, with the customer that pays the bulk of these royalties, Samsung.

SanDisk's current royalties agreement with Samsung doesn't end until August 2009. However, the fact that SanDisk already has advanced developments in place such as x3, which have already gone operational, and which will be soon be followed by the next generation, x4, will probably force Samsung to sign the new agreement earlier, since if it doesn't have some corresponding technological answers of its own, it could risk losing its competitive edge in this tough market. I would not be surprised if the volatility in the share price was a reflection of the negotiations with Samsung.

Harari, for his part, says he cannot confirm whether there are any negotiations at present, and he also tossed a smoke grenade in the analysts' direction when he said, "As is usually the case with them, if they sign it will be at the last moment."

I recently spoke to an analyst assistant at one of the large investment houses that covers and recommends SanDisk, who told me that "the body language of Samsung's managers when they answered this question at one of the conferences held recently, shows that they will sign." I hope he can indeed interpret their body language correctly, since Boaz Eitan of Saifun (SFUN) apparently couldn't and subsequently paid the price.

The other major announcement that has the potential to affect SanDisk's share price dramatically, although not directly related to it, is the prospect of Intel Corporation (INTC) abandoning the NAND chip market. It is now clear to everyone that there is one producer too many in the flash sector, and this is what is causing the oversupply. Intel is partnering with Micron Technology (MU) in flash chip production, and it had its sights on two major markets when it entered the field three years ago - gadgets, principally those of Apple (AAPL), and flash-based Solid State Hard Drives [SSDs], which in a few years time, will be an integral part of every laptop, Intel's bread and butter.

Intel's problem is that the rock bottom prices on the flash market have lost it money, and have "blighted" the excellent financials it publishes every quarter, as sales of laptop processors continue to flourish. Intel CEO Paul Otellini gave a very clear hint in his recent conference call that he is on the verge of winding up NAND production, just as he did with NOR, and any such announcement by Intel will give all the remaining flash producers a jolt, especially SanDisk, since it is considered the sole pure play company in the NAND industry. Furthermore, Intel's exit will pave the way for SanDisk to collect royalties from Micron, which currently relies on an old reciprocal exemption agreement between SanDisk and Intel.

Last weekend it was health issues that were uppermost on people's minds across the US. The somewhat ashen appearance of Apple Inc. (AAPL) CEO Steve Jobs when he appeared in public last Monday, cost the company a "risk premium" of 7% during the course of the trading week. Almost $10 billion in market value was shaved off the company that Jobs has led with spectacular success in recent years, as investors began to worry that the pancreatic cancer for which Jobs had been successfully operated on four years ago, might be returning.

There can be no doubting Jobs' tremendous importance to Apple, and how the share will fare in the coming weeks remains unclear, since on the one hand, the company has no intention of putting out any detailed updates about the state of health of its boss, yet having said this, investors, almost by definition, hate uncertainty.

There are those who refer to Microsoft Corp. (MSFT) as an example of an orderly transfer of command, and this is true, but there is still a big difference between Microsoft and Apple. Ever since Bill Gates took control of the operating systems market 20 years ago, the well-oiled machine he built has worked like clockwork, and it is highly unlikely that there will ever be another company capable of challenging its successful domination of this niche, no matter who it appoints as CEO. But even the all-powerful Gates was unable to replicate this success in other fields aside from operating systems, and will soon leave the company just as it faces a monumental failure in online search technology, that of Google's (GOOG) ascension.

Apple, on the other hand, needs a constant string of innovations every year in order to remain in the top flight, and if it doesn't deliver them, it could find itself reduced once more to the status of the stagnating computer company that it was before the launch of the iPod. It was Steve Jobs who single-handedly spearheaded the makeover Apple has undergone in the past few years, but it was not a one-off success like the operating systems of Microsoft, but rather, the result of a continuous stream of developments and innovations every year - and sometimes, even quicker.

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.

Comments

[sleepy:]

"Apple, on the other hand, needs a constant string of innovations every year . . ." shows you have not understood Apple. This is a single minded, integrated and very ambitious 10-20 year plan, not a string of disjoint fashion-powered innovations. Keep watching; more stuff will be happening soon.

2008 Jun 18 10:23 AM