SanDisk and the Saifun IPO
Rick Currin CurrinResearch.com
For Hager Technology Team
11/13/05
A recent article appearing in Barron’s mentions the now recently IPO’s Saifun as a threat to SanDisk. Not so fast.
It’s nice for SanDisk to finally get notice as a market leader in technology. Given that the company was not expected by many to do well, the ‘threat to SanDisk’ article is a compliment of sorts.
Not long ago the company was dogged by naysayers on assorted fears. One fear was that the falling prices of NAND flash would hurt SanDisk. The opposite has been true. As the article noted the falling prices of NAND have helped fuel the expansion of the non volatile memory technology beyond the storage requirements of digital cameras. Indeed three separate and robust markets are now in full bloom. Those three markets are digital cameras, USB storage and MP3 players. A fourth market is just beginning to emerge which is likely to be bigger than all the current markets in bloom. That market is the mobile handset market with its hundreds of millions of annual units sold.
It was also not so long ago that SanDisk traded lower on poor results from AMD and Intel in the NOR flash market. Like clockwork the market would see a lull in NOR flash and equate it weakness in NAND flash. Our subscribers were able to brush off the sluggish NOR market as inconsequential or even slightly positive for SanDisk.
The latest fear is that the nascent memory technology from Saifun could usurp NAND flash. While one can certainly put the anything’s possible tag on such a statement, there are fundamental reasons why we view Saifun as simply a healthy market response to a growing appetite for flash memory.
What Saifun (SFUN) is and Isn’t
Saifun is a licensor of technology. The technology they license is a form of flash memory currently unavailable in actual products. What is intriguing about the technology is that it could allow a density in excess of SanDisk’s current MLC technology. MLC technology allowed SanDisk to take advantage of their ability to cram more memory in the same amount of silicon than traditional NAND flash. It’s an advantage SanDisk still enjoys though Samsung has licensed the technology as well.
Saifun’s technology could lead to a 4 bits of storage instead of 2. In that respect it certainly is interesting. However, what Saifun cannot do is make memory like SanDisk/Toshiba and Samsung are doing. In short the NAND makers are potential customers of Saifun.
The article also mentions new entrants in the NAND flash market such as Hynix and Micron. Neither of these companies currently has a license for SanDisk’s MLC technology however. That puts the new entrants in the position of making less dense NAND (e.g. 2G capacity cards when SanDisk/Toshiba and Samsung can do 4G capacities with the same silicon). Of course histort suggests that a lack of license will not deter them from using MLC. SanDisk would benefit from such a course albeit with the unwelcome time delay of dragging a patent infringer kicking and screaming to the bottom line.
These new NAND entrants are going to need a license from SanDisk if they want to make flash with higher capacities. They would also need a license from Saifun to produce NROM flash with higher capacities. To compare Siafun as twice the capacity of MLC misses the point that it is 4 times the capacity possibility of what new NAND market entrants are putting forward. It’s important to keep in perspective who SanDisk is actually competing with on the production side of the NAND flash equation. The competition will not be with a technology licensor like Saifun.
A NAND flash killer or a flash maker licensor?
While SanDisk certainly has the current advantage with MLC there is no reason SanDisk could not take a license for Saifun’s technology as well. Although we believe NAND will dominate the NROM technology because of the huge head start, fast design shrink cycles and ecosystem in place, nothing prevents SanDisk from taking advantage of Saifun’s technology if the opportunity presents itself.
The Head Start and Volume production
NAND flash production using SanDisk MLC is already heading for 70nm. Saifun on the other hand has no flash in production. The NAND flash head start has another powerful element to it. Because NAND flash sales are growing fast, getting a fab up on time means millions in immediate revenue. That advantage makes it a difficult proposition to forego NAND flash fabrication leaving the money on the table for other producers or other technologies for that matter. Because NAND flash is being produced in large volumes the situation is even more daunting for a new technology seeking to compete on price. Volume production more than makes up for the ‘on paper’ potential capability.
The flash market will exhibit the same volume production dynamic as the DRAM industry. Whatever is produced in highest volumes gets costs spread across the production efficiently and becomes the low cost leader.
Saifun’s Tech is no Slouch
Certainly the technology that Saifun brings to the table is credible and has a good chance of finding some acceptance in the marketplace. We believe the technology will gain a bit of traction with the current makers of NOR. The speed advantages of NROM can deliver a positive advantage in the current NOR applications. NOR by the way still has certain technical advantages against NAND in certain applications. The current line up of licensees suggests this also.
The NAND game has been built on expanding the capacity, lowering the cost and expanding the applications. NOR could not keep up with the cost/capacity and volume sales gains of NAND. NAND is the path to gigabit capacities in mobile devices.
On balance we are actually pretty positive about Saifun. The company has a licensing business model that can deliver high margins if their technology gains any traction. As you are aware Fredhager.com is rather fond of this model with portfolio positions in Qualcomm, Rambus, InterDigital and SanDisk.
Apples and Oranges
A raging success of Saifun’s NROM can only come with the acceptance of manufacturers producing it in volume. As a manufacturer, and perhaps more importantly, retailer of flash memory SanDisk is just as likely to benefit from a technology lowering cost and expanding applications as anyone else. It does not follow that what could help the fledgling Saifun will hurt SanDisk.
SanDisk Uniquely Positioned
We remain confident about the fortunes of SanDisk consistent with our recent stock and LEAPS purchase. We view the company as uniquely positioned in the flash memory market. In particular we view the ability of the company to secure flash memory from Samsung as a major advantage.
With new production coming on line there will always exist a possibility for a near term excess of supply. But long term growth is likely to keep pace as applications continue to expand. SanDisk is positioned with the ability to cut back the amount of product it receives from Samsung even when supply and demand imbalances occur. This is a powerful advantage that protects margins even in near term supply excess.
The availability of high capacity NAND flash is fueling applications, volume production, and lowered prices in a virtuous cycle. We believe it will continue to do so for several years though individual hiccups in the application growth curve are nearly inevitable as well.
Steven 667 |
