Signs of Life for Semis

06/18/2009 1:00 pm EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith and Joshua Levine of ChangeWave Research say semiconductors are showing strong momentum, and they find one chip stock they say will rally nicely.

For two years the [chip] industry has been mired in a host of problems, including massive overcapacity and shrinking demand. That's not exactly a recipe for stunning returns.

But that's changing. Our ChangeWave Alliance Research Network just completed its quarterly corporate survey and tells us that semiconductors are looking good now.

In fact, for the second quarter in a row, the semiconductor sector is showing major signs of momentum that are so good that the industry ranked at the top of the nearly 20 industries we track each quarter.

Not only was this a positive sign for semi companies, but it was good news for the overall economy, as semiconductors are typically among the earliest sectors to regain momentum after a serious economic downturn.

One important finding was that more semiconductor industry respondents now believe that their company's sales for next quarter will come in above plan versus below plan.

Among semiconductor industry respondents, one in three said their company will come in above plan next quarter—a 29-point surge to the highest level in three years. Another key measure of the semi industry is inventory levels. They declined significantly this quarter, which is a good sign.

The bottom line is that these results clearly indicate that it is time to be invested in the semis, and the best way to do this is with short-term plays.

SanDisk (Nasdaq: SNDK) is the world's largest supplier of flash memory data storage products and serves both consumers and original equipment manufacturers. Its products are made for a wide variety of electronic systems and digital devices from cameras to mobile phones.

SanDisk is a real innovator, holding more than 860 US patents, more than 550 foreign patents, and it's the only company that has worldwide rights to both manufacture and sell every major flash card format.

SNDK managed to weather the downturn better than Wall Street expected. For the first quarter it reported that revenues fell 22% to $660 million, but beat the estimates by more than $120 million--and only lost 48 cents per share vs. the 76 cents consensus.

Last week, SanDisk renewed its existing cross-licensing agreement with flash chip supplier Samsung. Importantly, this new supply agreement removes a cloud from over SNDK and provides more clarity about its long-term business model and outlook.

Also, NAND flash memory prices were up 30% in April over March, and that's much better than the SanDisk's forecast. Our intelligence points to further strength this summer thanks in part to Apple (Nasdaq: AAPL) orders related to new iPhones and iPods, as well as orders for memory from Sony (NYSE: SNE) and Nokia (NYSE: NOK) for new handsets.

We recommend that you buy [this] as a short-term play with the objective of capturing 25% to 50% returns within three months. Our Buy Under prices for SNDK [is] $16. (It closed around $15 Wednesday—Editor.)

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