The SSD Effect

Includes: CAMT, MU, NVMI, WDC
by: Shlomi Cohen

After the indices achieved double-digit gains in a dream first half - the record of 15% was set by the small-cap index, the Russell 2000 - the test of the results is now upon us. Despite the records, it is not so much that expectations of second quarter results are high as that it assumed that the second half will be much better than the first, so the third quarter guidance will be critical.

Technology companies will only begin publishing their results next week. Yahoo! Inc. (Nasdaq: YHOO) will be the first company to publish its results, on Tuesday, followed on Wednesday by two gorillas, Intel (Nasdaq: INTC) and IBM (NYSE: IBM), for which expectations are quite low. Little is expected from Intel, because the PC market is waning, but we expect to hear for the first time about the road map to the mobile world from its new CEO, Brian Krzanich. Expectations at IBM are low, because just two weeks ago, rival Oracle (Nasdaq: ORCL) disappointed, "due to a challenging macro environment."

At the same time as the two giants, SanDisk Corporation (Nasdaq: SNDK), for which expectations are high, will also publish its financials on Wednesday. Its share price recently recovered to the peak last seen eight years ago, when it soared because of the "iPod effect." Euphoria ruled back then, when Apple Inc. (Nasdaq: AAPL) CEO Steve Jobs first discovered the marvels of NAND flash memory as the ideal solution for storing content on iPods, instead of complex mini drivers.

The "iPod effect" caused flash stocks to soar, led by patent-rich SanDisk, which rocketed to almost $80 in early 2006. Two and a half years later came the "iPhone effect," which economically was several times greater than the "iPod effect". But it resulted in disaster, almost to the point of bankruptcy, and a share price of $5. At the time, the iPhone euphoria caused all flash manufacturers to pour billions of dollars, which they did not have, into the construction of new fabs and the expansion of old production lines. The timing, on the eve of the global crisis, was wretched.

This year, SanDisk and its rival Micron Technology Inc. (NYSE: MU) have returned to peaks we have not seen in many years, because of a new effect that is unrelated to the exclusive successes of Apple. This is the "SSD effect," a growth engine which has been talked about for years, but which only became significant in the past year. In contrast to previous years, this time no euphoria is accompanying the pickup in SSD sales, and investors really like the miserly budgets for expanding production lines characterizing all the manufacturers, which prevents a surplus of processors and a price collapse.

The change in the capital market's perception of flash stocks can easily be seen in how they have parted ways from the behavior of smartphone stocks, Apple and Samsung Electronics (OTC:SSNLF). Both companies' shares have crashed since the beginning of the year because of disappointing smartphone sales. But flash stocks SanDisk and Micron have surged, something we haven't seen since the launch of the first iPhone in 2007.

As mentioned, I attribute the phenomenon to the rapid penetration of SSDs in the consumer and enterprise sectors, along with the stability of processor prices. Investors in flash stocks love the miserly investments, but the managers of and investors in the processor inspection equipment manufacturers are waiting for the moment when flash producers resume their massive investments. This week, the equipment makers and investors in the sector will meet at the Semicon West 2013 convention in San Francisco. Two Israeli companies in my portfolio, Nova Measuring Instruments Ltd. (Nasdaq: NVMI) and Camtek Ltd. (Nasdaq: CAMT), will participate. Nova will mostly use the conference for one thing: to persuade customers and investors that the surprise announcement that successful CEO Gabi Seligsohn is resigning has nothing to do with the company's business. The company says that its business momentum will continue under his successor, Eitan Oppenhaim.

Seligsohn will say farewell to investors when Nova publishes its financial report for the second quarter at the end of July, and there is no doubt that this will be a sad affair, because of the resignation, but also happy because of the results and guidance.

Camtek's share price has risen over 60% since the beginning of the year and the trading volume has increased, indicating that foreign investors have invested in the company run by CEO Roy Porat. The revival mostly began with the strong guidance for the second quarter, published in May. I assume that investors at the Semicon West conference will hear that the positive momentum is continuing, especially for sales of chip inspection equipment. With a market cap of just $70 million, $20 million net in the bank, annual sales of $90 million, and expectations of a swing to profit in the second quarter, I believe that the company is cheap, despite the jump in the share price so far this year. In addition, the company has a potential dream in digital printing on circuit boards, which should become substantial next year.

Published by Globes [online], Israel business news - - on July 8, 2013 © Copyright of Globes Publisher Itonut (1983) Ltd. 2013 2013 Reprinted on Seeking Alpha with permission