from the SSB report...this is a little closer to home than the general call most have seen in the headlines (and, yes, i do understand the difference b/w flash and compact flash):
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SSTI: HIGH EXPOSURE TO COMMODITY FLASH PRICING; 1S (BUY) NOW 3S (NEUTRAL)
Reducing rating and price target. We are reducing our rating on SST because it
recently passed our price target of $105, while at the same time Flash industry
fundamentals appear to be in the very early stages of weakening. The weakening, by the
way, is far sooner than what is expected by all Flash makers, who expect demand to
exceed supply through 2001.
Riding the wave. SST has done an excellent job of taking advantage of the boom in
Flash memory, for use in code storage applications for PCs, cellular handsets, and digital
consumer, including MP3 players and digital cameras. Its current business remains on
fire: last week the company reported a significant upside to analyst’s estimates, reporting
EPS for the quarter would exceed $0.50 (versus a loss of $0.07) on revenues of about $94
million (up 50% qoq and up more than 300% yoy). This was well above our estimate of
$0.40 on revenues of $75 million.
Business should remain strong for this year. We anticipate the company will continue
to see strong business trends for the remainder of this year, mostly driven by continuing
strong demand for Flash in “Internet computing,” particularly since Intel has designated
the company as a key supplier of its BIOS Flash, demand from networking, and digital
consumer. The company has less than 10% direct exposure to the cellular handset market.
Lots of Flash capacity coming on line. Flash is a commodity product—several dozen
players supply basically the same product. Given the very high levels of profitability in
that area, Flash has in recent quarters attracted a significant amount of new capital.
Virtually every large Flash player expects to double or even triple output over the next 18
months. AMD plans to increase its Flash capacity by 75% this year and 100% each year
for the next three years.
Just as availability is improving. We are already beginning to see the impact from that
increased output, coupled by perhaps slower demand in cellular handsets. Availability is
without a doubt beginning to improve, which means lead times are beginning to come in.
We believe the next step will be declining prices—already we have seen some spot
brokers reduce prices on 1Mbs and 8Mbs, though we do not yet believe the trend is
widespread. In addition, we are beginning to see industry data roll over. Flash shipments,
which reached a peak of 204% growth in February, slowed to 165% by May. Obviously,
that is still a very rapid growth rate, but one that points toward rapid deceleration. |
