SanDisk: More Than Flash

03/05/2004 12:00 am EST

Focus:

Fred Hager

President, Fredhager.com

Fred Hager takes a very focused and thorough approach, providing in-depth research on a select few technology stocks. Here, Hager and analyst Rick Currin explain the market for non-volatile flash memory and the outlook for industry leader, SanDisk.

SanDisk (SNDK NASDAQ) is involved in the market for NAND flash memory, a form of non-volatile memory well suited to mobile devices. Non-volatile means that unlike DRAM found in PC's which requires power to refresh the memory, the memory of NAND remains stored without power present. This makes the memory format suitable for portable devices as well as for transport from device to device similar to those little 1.44 MB floppy disks headed for the technology museum. Many of you are already familiar with the removable memory cards used to store digital camera images and might actually have one or more of these NAND flash cards already. To a great extent, the proliferation of digital cameras is the main driver of the massive surge in NAND flash market. However NAND is also used as digital storage for MP3 players, cell phones, PDAs, and USB device storage.

"Although SanDisk has forecast strong earnings growth for 2004, the stock has pulled back on market concern that price pressure in the NAND flash market will dampen the company's outlook. In our view the price and capacity issues of the NAND flash market are not accurately represented with these commodity product concerns. We believe the situation presents a compelling opportunity for investors to take advantage of the latest pullback in the stock. The concern the market has is that while SanDisk is a leader in the market, new NAND flash entrants will erode SanDisk's price and share. To some extent that  effect is present as DRAM makers have decided to wade into the lucrative NAND market. However, we believe the risk is exaggerated.

"Indeed, SanDisk welcomes price declines of NAND flash as a path to widespread adoption. This is actually a goal of the company to foster continuing high demand and universal adoption of NAND flash as removable storage.  An example of price decline leading to demand is the MP3 solution. The pricier MP3 models utilize a high capacity hard disk, while the NAND flash storage is utilized in other models. SanDisk believes the higher density removable media will drive adoption of NAND. For example with low-priced removable media on a USB key chain holder, friends can share USB keys to share songs in much the same way friends swap video games.  It's harder to do that with a hard disk. Similarly, lower priced NAND for cell phones is one of the company's aggressive pursuits. This is a wide open growth market for advanced feature cell phones capable of video, picture taking, and 3G wireless feature sets. The company recently unveiled a proprietary T-flash for cell phones.

"SanDisk has a strong intellectual property position. The company already counts as licensees Intel, Samsung, Toshiba, Lexar, and Sony among others. Licensing revenues also bring high margins. The more adoption there is of NAND in the marketplace, the more expansive the high margin component of SanDisk's business becomes. We believe the disconnect between the company's optimistic outlook and the recent decline in the stock are a buying opportunity."

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