Barron's SanDisk Article:
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An Interview With Bill Gerlach...
Q: You haven't mentioned any of your tech plays.
A: Okay. SanDisk. This is a maker of multimedia flash memorycards for digital cameras and MP3 players. Qualcomm recently announced that SanDisk multimedia cards have been designed into their next-generation CDMA cellular phones. Basically, for any sort of removable flash storage, SanDisk is in that market. They license their technology to many other people. We started buying the shares last October after a third-quarter earnings shortfall. They had exceeded their top-line expectations; revenues were higher than expected. But they missed the bottom line by two cents. The stock immediately went, on a split-adjusted basis, from 26-27 to 18-19. Just on the miss, because people had been expecting a fairly big number.
We checked into why they missed their number, and we found out that business had been so strong that they had taken their 64-kilobyte wafers and transferred them all to 128-kilobyte wafers. So they tried to basically double what they were making to fulfill demand. They had yield problems initially, which hurt gross margins a lot. But at the same time, orders had increased sequentially by about 150%. The yield problem, according to the company, was solved and orders were booming. This was a real opportunity. There was a big seller. We cleaned them out. I began to do extensive research on it. We bought it at prices all over the place. Now again, this is one of those companies that probably got a little ahead of itself. It rose to 140-150. It's back down to the mid-60s. Recent business trends are very good. [Analysts surveyed by First Call are forecasting earnings growth of 35% for next year.]
They are capacity-constrained at least until the end of this year. That is what they told us. They have a deal with Toshiba. They both have very good technology, essentially to fit as many flash memory cells in the smallest area possible. So you get something that's far ahead of the competition in terms of technology. They have 100 patents for all sorts of things. I don't want to be hyperbolic, but it is like a Qualcomm. They have the technology standard and get paid when others use it.
They have all the things we like. They have rising margins. They are taking market share. They have defensible patents. They're not in a commodity business. The market is completely supply constrained. And it is a very usable technology.
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