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November 21, 2005

Touching a nerve with SanDisk, Mon., Nov. 21, 2005, 7:55 PM

Today theStreet.com carried an interesting article (Flash moves to fore") by Alexei Oreskovic. The article gets to the heart of a key battle in the memory wars. The key players in this one are Intel (NDQ: INTC), Micron (NYSE: MU), Apple (NDQ: AAPL) and SanDisk (NDQ: SNDK).

MU is a dog of a stock with a P/E of 49. Intel is desperately trying to find new products to replace those in decline in the hard drive and RAM area. SNDK still is Flash-king and holder of major NAND licences which are used by INTC but not MU (yet). AAPL is on a roll with iPod.

I think it's a good article by Oreskovic. He balances SNDK's position in all of this.

Expect some product rollout news from SNDK and/or litigation here. Also, If APPL is buying up all this IM NAND production (probably for a low-cost notebook that runs on flash as per the recent Negroponte article), then who is going to go head to head with APPL for this market?

Maybe SONY and/or DELL would turn to SNDK for supply and best pricing?

Could this be a Coke/Pepsi war in the making " the one where brokers can take the stock to the moon?

When a trader can figure out the story and take a position in these win/win scenarios, it seems hard to lose money, if the timing is right.

As you know, SanDisk is on the Cara Global 100 Best Companies list. So, in the short term, I hope SNDK gets creamed again and again by this story because I believe they will bounce back, and remain at the top of their game.

Intel is also on the Cara 100 list, but it has the mega-billions to make a $3 billion investment in a joint venture of this kind with Micron. I wonder if the same is true about MU. Micron has a very poor record over many years in terms of profitability (ROA, ROE, or ROCI). I mean this is a company that put losses of about $3 billion to the bottom line over three years 2001-2003, and has earned just a total of less than $350 million since. We're not talking Intel here.

And if INTC and MU are each putting that kind of dough into this JV, they had ought to be banking on a much bigger market for NAND flash than iPods, in my view.

And btw, SanDisk has enjoyed a solid six years (except for 2001) of profitable growth, solid returns, solid financial strength " on top of technology that is at the forefront of flash memory. It is not a major company " after all I think it has fewer than 1000 employees.

With the smashing in price this week, SNDK is back into my Accumulation Zone. It's time to look at the reasons why traders have been so negative. It's off "28 pct in 11 trading sessions.

When it goes with a quality company, that's my kind of number. Come to me baby.

Posted by Posted by Bill Cara on November 21, 2005 07:55:36 PM | Category: Flash Memory

Discourse

Great post again. Most important point for me in your post was: "Could this be a Coke/Pepsi war in the making – the one where brokers can take the stock to the moon?."

If you have tracked Sandisk CEO's comments over past several years this has been exactly his point. He doesn't care if Sandisk's margins fall on the older products - he is just trying to grow an $X billion dollar yearly market into a $XXX billion dollar market. Then Sandisk can license its technology and enforce its patents against each producer while remaining a marginal producer itself. Of course the reason that it may maintain a multiple of 20-30 is that royalty based revenue.

Now with the promise of BOTH mobile phone market and Ipod market the flash memory sector outlook has been quite bullish. The following quote is what I saw replayed over and over again earlier today: "This venture is probably going to be a substantial threat to SanDisk," said Oppenheimer & Co. analyst Vijay Rakesh, who recently initiated coverage on the stock with a "Neutral" rating. "Intel and Micron don't have to pay royalties to SanDisk -- and right now SanDisk makes about 15 percent of its revenues, or 40 percent of its operating profit, from royalties. Plus Intel and Micron can increase memory supply and put pricing pressure on SanDisk."

The last sentence regarding Intel and Micron - "not having to pay royalties" is one reason I think the stock was down 15% today instead of 5%. Bill's article alluded to this as did TheStreet.com article. For me though this is exactly the crux of the issue - as Intel and Micron just validate what a hot market this really is - now can Sandisk retain and enforce its IP portfolio? So far so good.....

Its getting close to $60M a quarter royalty revenue. This is up near 50% from last year. If market continues to grow and IP portfolio is honored we could be talking $100M a quarter not too far out - then we can make the Qualcomm type comparisons for a minute at least and see what kind of multiple gets awarded. Then we see $100-200 stock price.

Question is in the meantime - who is right regarding the IP portfolio. And more importantly -is the Oppenheimer analyst - a) on top of things, b) a moron, c) rigging the game to bring the stock in to pick up shares, or d) misquoted. I have no clue and I have not read his research report so no further analysis.

Best regards and I apologize for any repetition.

-BG

Posted by: Soulek1 [TypeKey Profile Page] at November 22, 2005 1:08 AM [link]

Bill-
While Value Line is not the be all and end all of analysis points, it does act as a third party unbiased check and balance for those of us out here who do not have significant analytical expertise (or time for that matter). VL seems to be placing a fair value on SNDK for 2006 of $1.85 EPS times a PE of 26 for a $48 value. As the stock price is presently just below this number what in your opinion is the weakness in their thinking? Thanks.

Posted by: MarkM [TypeKey Profile Page] at November 22, 2005 6:16 AM [link]