SanDisk (SNDK)
Rick Currin
09/24/04
SanDisk continues as the leader in the flash
memory market. Earlier this year the stock suffered on margin
concerns for the coming quarters. SanDisk however has employed the
dynamics of price elasticity to spur demand in the flash memory
market. By indicating a willingness to temporarily sacrifice profit
margin potential, SanDisk is aiming to boost demand in the flash
memory market. The market did not like the strategy and took it out
on the shares of SanDisk. In reality the pricing strategy took a
toll on competitor Lexar as SanDisk took market share with their
strategy and turned in a nice quarter with margins intact.
Huge Opportunity in a Growing Market
The market looks at the business of SanDisk as
a commodity memory market. However SanDisk looks at the flash
memory market as one of explosive growth potential. SanDisk’s move
to lower the overall price of flash memory is consistent with the
company’s strategic plan to vastly expand the use of flash memory
from its familiar home in the digital camera market. The aim is to
make the memory commonplace in advanced feature cell phones, mobile
data storage, and a technology of choice for a wide array of mobile
devices.
In other words by taking advantage of the
elastic demand in flash (lower prices creating more sales volume
through higher demand) SanDisk is actually aiming at a nonlinear
effect. Those nonlinear effects will result as flash memory is not
only shipped in greater volumes for existing applications, but
adopted in even more mobile device applications.
While the market thinks SanDisk is sacrificing
some margin, in reality SanDisk is pushing the market toward their
technical advantage. The technical advantage of SanDisk is in their
MLC technology and the company’s overall strength in patent assets
for flash memory. MLC (multi-level cell technology) allows much
higher densities of flash memory. The higher the density the better
the margins. That is, 1 GB NAND flash memory demands better profit
margin than 128 MB NAND flash memory. The reality of technical
advancement dictates that flash memory will be produced in higher
densities in much the same way that computer DRAM memory has been
over time. The process occurs as manufacturers switch to smaller
cell geometries allowing more memory per silicon.
This inevitable increase in density also serves
to expand the flash market for SanDisk. SanDisk strength is in NAND
flash. There is a competing memory type known as NOR flash that
cannot match the density advancements of NAND. NOR flash is however
well suited to the quick boot applications such as the operating
system of the mobile devices. Traditional DRAM manufacturers are
lining up to produce NAND flash with the anticipation that NAND will
largely replace NOR in cell phone applications. Because of
SanDisk’s strong patent position in NAND flash, the company is well
positioned to receive licensing fess and even output agreements from
suppliers. Such an agreement has already been achieved with
Samsung. Although the entry of additional flash manufacturers is
certain, SanDisk is in the position to reap high margin royalty
revenue from these entrants.
The Market Misunderstands SanDisk
One of the interesting things about SanDisk is
the way the stock is confused with the fortunes of others. For
example SanDisk has traded in sympathy with poor NOR flash memory
results from Intel. This is misplaced sympathy as NOR is targeted
as a replacement market for NAND flash. Remember, semiconductor
manufacturers have placed bets on NAND flash as a replacement for
NOR flash in the cell phone market. Interestingly, it is indeed
this NOR cell market that Intel recently cited as weak.
Meanwhile, the NAND flash market sees companies
such as Toshiba and Samsung recently boosting NAND flash capacity to
take advantage of the proliferation of the memory type.
Big Growth in NAND Flash for Cell Phones
Expected
Recently, SanDisk announced it is supplying Samsung with 32MB
miniSD flash memory cards for use in Samsung’s digital camera
phone. The new Samsung SPH-S2300 will be the first cell phone to
integrate a 3.2 megapixel camera with 3X zoom. Though quite popular
in concept many users have been a bit under whelmed with the low
picture quality of photos taken with the current crop of low
megapixel cameras integrated into cell phones. This new deal
forecasts the trend toward higher quality levels of integration and
increasing dependence on storage for mobile products.
In an article this week in Electronics Weekly, the market
research firm Future Horizons said that flash memory sales will
reach $15.9 billion by the year 2008. Sales in 2003 were $4
billion. The firm also predicted that flash memory in cell phones
would overtake the flash memory for digital cameras as early as next
year.
The growth trend in flash for cell phones is right in line with
the objectives of SanDisk. SanDisk CEO Eli Harari has been talking
about the huge flash memory potential for the cell phone market for
some time. The miniSD deal with Samsung bodes well for SanDisk.
Future Horizons forecasts that miniSD will have the largest market
share of the flash market followed by Sony memory stick. SanDisk is
positioned well on both fronts.
We are very bullish on the outlook of SanDisk and added it to the
Hager portfolio 9/10/2004. We believe the combination of the rapid
growth in the flash market, SanDisk’s retail marketing savvy, and
the mix of high margin revenues the company will receive from the
licensing of its technology will propel the company higher despite
new manufacturers seeking to join the NAND flash party.
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