Of Bears and Shares: Spansion, Apple's iPhone

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Includes: AAPL, SFUN, SPSN, WDC
by: Shlomi Cohen

Share indices continue to dive and it looks like nothing can halt the slide. Not even the strong results from IBM Corp. (NYSE:IBM) and General Electric Co. (NYSE:GE), two US gorillas which together cover almost every corner and sector worldwide, and whose better-than expected results, and guidance for 2008, are far removed a looming recession.

The mood among investors is becoming increasingly somber, and every morning the financial media goes back in time to find the last occasion when there was a January as bad as this, in which the Dow Jones lost 8.8% as of last Friday. So far they've reached 1950.

I am not building any hopes on the upcoming results, nor on Fed chairman Ben Bernanke to provide the low I'm waiting for, since investors have already pocketed the 50 basis point cut in the interest rate due at the end of the month and when the cut is announced, they'll say there's nothing new about it and that it amounts to "too little, too late." Dramatic slumps on the markets like the ones happening now can end abruptly without any clear economic reason. The reason is usually psychological, meaning a sudden change of mindset by investors.

With this in mind, my hopes that the low point is near rest on weekly financial magazine "Barron's". On Saturday, Wall Street's pundits picked up their copies of this weekly magazine and they will have been browsing it right through the long weekend. What they see is a lumbering bear staring back at them on the front page of every copy.

Wall Street's elders know that, when a prestigious publication has a full-page spread of a bear on its front page, it's a sign that it's time to buy shares and that the landslide is just about over. The opposite also applies; when the front page features a raging bull, it's time to sell.

In its article, Barron's provides investors with a number of economic reasons why it would be worth their while buying stocks now, despite the ever-present shadow of the bear. The S&P 500 began Monday at 1,325 points, which means it is currently at a multiple of just over 13 on the average expected operating profit for 2008 of the companies listed on it. Barron's points out that, during the low of 2002, this index was at a multiple of 15 on twelve month-earnings estimates.

Even if the profits of the financial sector, which constitute a substantial component of the index, plunge lower than anticipated this year, the multiple will probably not be higher than 15, which makes it unquestionably an attractive one. It was a multiple like this in 2002 which in set in motion the bull market that continued until now.

Saifun investors on guard

Investors in non-volatile memory technology company Saifun Semiconductors Ltd. (NYSE:SFUN) are paying close attention to what Spansion Inc. (SPSN) announced for the fourth quarter, and more importantly, its guidance for 2008. The merger between the two will close next month and Spansion will probably comment on it in its guidance.

Spansion's share was at $8 when the merger was announced on October 8, 2007. It has slumped by more than 60% in the three months since the announcement, and is currently traded at $3.03, largely as a result of the collapse that hit the entire chip sector, with companies like Spansion suffering the most.

With Spansion and Saifun now commanding a combined market cap of around $550 million, less than half of Saifun's market cap alone when it was at its peak, Spansion's share price probably can't fall much further. Moreover, if it transpires at a later stage that Saifun's technology is indeed a solution that can work well with NAND once production geometries are lowered significantly within two to three years, the upside could resemble that on a call option, meaning a massive rise. Notwithstanding this, there is always the risk, albeit remote at present, of bankruptcy, should the mobile handset market enter a severe recession and Spansion and Saifun fail to stem the current hemorrhaging.

Waiting for Apple

Most of the fanfare surrounding this week's wave of results will center on Apple Inc. (NASDAQ:AAPL), which reported on Tuesday. Investors informed Steve Jobs last week that the fact that he managed to sell a staggering 2.5 million handsets in the latest quarter cut no ice with them. I even think that Jobs was wrong when he said that four million units had been sold in the 200 days since the launch, since almost everyone I know already has an iPhone, not to mention the fact that everyone is crazy about the handset.

Only yesterday I heard yet more praise for the iPhone, this time from someone who is a heavy gadget user but very selective and can appreciate a good "toy" when he sees one. I refer to my former colleague at "Globes" Omer Shvili, now a senior consultant with online gaming software solutions company Playtech Cyprus Ltd.. It was thanks to him that I finally realized why the iPhone would ultimately become the killer application that flash industry leaders like SanDisk Corporation (SNDK) CEO Dr. Eli Harari are looking for.

I understood from Shvili that the 8Gb version of the iPhone is rapidly becoming irrelevant, since in addition to its storage capacity and the video and voice functions it already supports, programmers around the world are writing new memory-guzzling applications for this handset almost daily. Jobs himself called it the world's best music and video player, so the 16Gb version of the iPhone will be on the market a lot sooner than people think. It is also highly likely that the next generation of the iPhone will come with a slot that will enable its memory capacity to be expanded far more than is possible at present with the drop-in flash drive.

Anyone not holding Apple shares would be well advised to seize the opportunity if indeed the stock continues to head south, since in the longer-term Apple will become number one in the smart handset market. Its domination will not be limited to the consumer sector, since I feel it is already a major threat to Research In Motion Ltd. (RIMM)'s position as the leader of the enterprise market with its Blackberry device.

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.