Dave, when I mentioned interest rate fears, I wrote in regard not only to SNDK but to the equity markets in general. That is a risk that all stock investors must allow for, and some will respond by shorting a stock like SNDK.
Comparing the flash memory industry to the commoditization of DRAM ignores key differences in the two technologies. DRAM is wholly a commodity, and the only thing that really matters is the cost of production. Flash memory has not reached that point, as shown by the continued viability of SNDK patents, the difficulties some companies have in producing MLC chips, and the differences in read/write performance of various units.
Furthermore, when you say "revenues are increasing, margins are decreasing," there is a major difference between flash memory and DRAM: When that point was reached with DRAM, demand had leveled off. With flash memory, demand is increasing rapidly from quarter to quarter and year to year. So, while it is true that margins may be dropping for flash, it appears that overall profits for all the low cost producers are increasing because of the huge increase in units sold.
You also believe that "management is under no obligation to update their guideance." That is incorrect. Under the SEC rules, management is ALWAYS obligated to announce a significant event that may affect earnings or financial condition. And management MUST make that announcement in a timely fashion. If you don't believe that, you probably are not aware of the numerous lawsuits filed against companies for that very reason--lawsuits whose cause of action preempts any "safe harbor" clause that the company may have used in order to get off the hook.
Thus, if SNDK management knows that profits, for whatever reason are likely to be lower than previously anticipated in earlier guidance, management must make that known to shareholders and the public. This is usually done in a routine filing of new information with the SEC, accompanied by a press release aimed at investors in general or at shareholders in particular.
We've got a little over two weeks between now and the earnings release. I grant you that management still has time to advise the public of any changes in earnings prospects. But the quarter has only 3 business days left. SanDisk by now must know pretty much what its sales will be like for the quarter. If the sales (and potential profits) look better than expected, it's true that SanDisk would not have to inform the public (if it didn't want to), but in the event that there are dark clouds on the horizon, SanDisk has no choice if it is aware of potential adverse conditions.
It is certainly appropriate to worry about additional capacity. A company associated with Hitachi says it is going to increase its wafer production substantially as a result of going to lower nano technology. Substantially higher flash chip production capacity could become available as early as a year from now (but not this year). The question then is whether LONG TERM DEMAND will be sufficient to accommodate LONG TERM SUPPLY.
This is where many analysts and portfolio managers can be misled if they don't understand the technology and where the industry is moving. We have already discussed in numerous posts here the new applications made possible by lower prices (a textbook example of highly elastic demand). We have also agreed that MB per chip is constantly increasing, which has the effect of increasing profit margins or at least counteracting the impact of lower prices.
One could surmise that 2005 will be a watershed year for flash memory. Were demand to level off in the face of increasing supply, the first companies to be hurt would be those who are not low cost producers or who do not have well developed retail outlets to permit the higher margins one usually can get at retail, as opposed to wholesale. This scenario triggers consolidation, which occurs with virtually every industry that begins to mature. The winners are the low cost producers who already have a substantial market share.
Finally, as price cutting occurs, it can hurt firms that already have a large amount of debt, because debt service costs are for the most part fixed (or even rising now if the company has only short term credit). SanDisk is in the strongest position because of its low debt, compared with ALL other flash memory producers or sellers. I simply do not see any potential weakness for SanDisk in the coming 12 months, absent an entire market collapse. The short sellers can factor in a market collapse if they want, but, at least until the November election, I'm not going to bank on that.
Art |
