SanDisk (SNDK) is likely to benefit from strong demand for NAND flash memory product that is likely to exceed supply in the coming months. This could be seen from OCZ Technology (OCZ) reducing its revenue outlook for the second quarter recently on short supply of NAND flash memory. This apart, technology bellwether Apple (AAPL) also will likely provide more details about its upcoming product releases' on September 12 to guide the NAND flash memory sector further.
The news of OCZ Technology cutting its revenue forecast came after Toshiba slashed its NAND flash memory production by 30 percent from July 24. The production cut initiated by Toshiba is likely to intensify demand prospects for NAND flash memory. This is primarily due to robust demand for smartphone and tablet PCs. The typically seasonal second-half should stimulate higher demand. NAND flash memory is a component for media tablets, ultrabooks, smartphones and e-readers.
The recent data suggest an improving supply and demand landscape is on the horizon. NAND flash memory prices for both spot as well as contracted have stabilized following the rationalization of supply from key producers. In a research note released on September 10, S&P Capital IQ analyst Angela Zina sees cyclical rebound in the group. "We think demand is likely to exceed supply in the coming months, likely elevating supply constraints, which should aid pricing trends and lead to potential upward revisions to consensus earnings estimates," the analyst indicated.
The analyst view is clearly demonstrated by OCZ Technology's preliminary results for the second quarter. The company's CEO Ryan Petersen comments hold significance. He said, "Despite achieving bookings in excess of our expectations for our second fiscal quarter, we were not able to meet our previously stated revenue guidance due primarily to constraints in NAND flash supply." Significantly, the company witnessed shortage of some NAND flash components during the month of August and expects it to continue as a result of production cuts by industry leaders.
Interestingly, Samsung too indicated its intention to convert to the production of logic products from memory chips at its Austin, Texas facility. The production cuts by Toshiba and Samsung will reduce the inventory in the market thereby improving the overall balance of the supply/demand curve.
More over, in the last one week or so, new product introductions were launched by the likes of Nokia (NOK), Motorola (MOT) and Amazon (AMZN) thus supporting the demand side. Mobile phones consist of over 45 percent of the total NAND market bit share, according to S&P Capital IQ. This apart, Apple is set to launch its iPhone 5 on September 12. Analyst Zina believes that Apple is the single largest potential catalyst to drive the NAND flash market since it consumes 20 percent of total NAND flash and the company's forthcoming new product releases' could throw more light on the demand side of the NAND flash market.
Additionally, Microsoft (MSFT) is planning to launch its Windows 8 and more smartphone and tablet products are also in the pipeline, analyst Zina viewed. The recent macroeconomic issues have also forced customers to hold back on rebuilding inventories during the first half. The second half is crucial because of the seasonality and this could provide opportunities for NAND flash memory producers to price its spot as well as contract aggressively.
It appears that SanDisk is well positioned to gain from the available opportunity both within the client and enterprise solid state arena. The company strengthened its position in enterprise solid state drives or SSDs with the Schooner Information Technology buy in June, Flash Soft in February and Pliant Technology in May 2011. These acquisitions would help the company post significant revenue from SSD in the next few years.
Meanwhile, S&P Capital IQ lifted its price target to $55 from $53 on P/E and price-to-sales metrics within historical and peer ranges. The analyst also increased operating EPS estimate for 2012 to $1.85 from $1.77. Zina added, "We believe SNDK possesses the best balance sheet among pure based memory peers in our coverage universe, and think it is an ideal way to play the NAND flash market." On the risk side, competitive pressures, more weakening in end market demand and price erosion could play a spoil sport.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.