Analysts Back Online Investors,
Who Bet SanDisk Will Recover
By CARRIE LEE
THE WALL STREET JOURNAL INTERACTIVE EDITION
It's been a rough year for SanDisk. Amid fallout from Asia and sinking prices for a key product, many shareholders have bailed out. But online investors remain loyal, and Wall Street analysts say they know why.
SanDisk, believers online and on Wall Street say, remains poised to benefit from growth in the market for digital cameras. The Sunnyvale, Calif., company invented the type of flash memory -- computer memory that retains data even when its power is switched off -- that is used on most digital cameras sold today, and its technology is finding its way into other products, including cellular phones.
"These guys have invented a standard that is being adopted in a lot of rapid growth markets. They should be a primary beneficiary," says Bennett Notman, and analyst at Wheat First Union in Richmond, Va. "These guys are really well positioned with the patent portfolio and the technologies that they've invented."
But right now, things don't seem so rosy, and plenty of shareholders already have shown that they've had enough.
Consistent selling in the stock sliced its share price by as much as 80% this year -- from its high above 26 in March to nearly 5 earlier this month. As recently as October 1997, the stock traded at 40. On Tuesday, SanDisk shares fell 1/16 to 9 1/16 on the Nasdaq Stock Market.
Weakness in the Japanese economy, from which SanDisk records 30% of its revenue, remains a high hurdle for SanDisk and its stock, analysts say. They also see a big challenge in a decline in the selling price of digital cameras, which has sliced into the company's profitability. "We like [SanDisk's] fundamentals ... but until Japan shows some strength, and pricing pressures abate, we remain cautious," says Mr. Notman.
But many people who frequent online message boards remain hopeful. "Still a good buy at these levels," wrote one person in a Yahoo! Finance (quote.yahoo.com) message board last week, as the stock rebounded from its lows. "Asia is the only thing holding the stock back right now. Growth is there," the posting said.
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"Japan has been very weak, we've had strength in Europe and the U.S., [but] Japan has been flat for the past four quarters," says Eli Harari, chief executive officer of SanDisk. But Mr. Harari says he isn't worried about declining camera prices because he believes SanDisk will be able to use its technology to introduce products that garner higher prices.
SanDisk has 65% of the flash-memory market, but faces price pressures from Japan's Hitachi.
Even though the price of memory is falling on the basis of each megabyte of storage capacity, the company is working to pack more megabytes into each flash-memory card. In the third quarter, for instance, the per-megabyte price fell 30%, but the company's gross margins increased to 22% from 12% in the second quarter of 1998.
"Price declines are positive in the way that they expand the total market. Once [we] reach certain consumer price points, we expect to see tremendous market elasticity," says Mr. Harari. "Sales are still relatively small, as markets increase ... sales will increase," he says.
Market research firm Dataquest, which is based in San Jose, Calif., estimates that 4 million point-and-shoot digital cameras will be sold in 1998, twice the amount sold last year. The firm predicts that 9.2 million will be sold in 2002, although lower prices will offset increases in demand.
Still, SanDisk's earnings in the third quarter fell to $2.6 million, or nine cents a diluted share, from $6.8 million, or 27 cents a share, a year ago, while revenue fell to $32.1 million from $36.2 million. Revenue from patents and licensing royalties contributed 25% of total revenue for the period. Looking forward, First Call said analysts expect the company to earn 40 cents a share for 1998, down from 79 cents in 1997.
Another competitive concern has been Sony's Digital Mavica camera, which stores information on a floppy disk rather than in flash memory. But Mark Edelstone, an analyst with Morgan Stanley Dean Witter in San Francisco, expects the popularity of the camera to be short-lived because, although it's easy to use, it's image quality is limited.
SanDisk also has its eye on other markets. The company owns a patent for multimedia cards to be used in cell phones, and has recently started shipping that product. The postage-stamp sized cards allow users to store phone and electronic-mail messages, directory listings and other information on their cell phones. Mr. Harari says the cards have been adopted as the standard for storage by five cellular phone manufacturers, including Nokia and Ericsson. "We don't expect sales to materially impact this year, but they will in 1999," he says.
SanDisk also started shipping flash-based storage drives as an alternative to computer disk drives during the third quarter. These drive replacements, called FlashDrives, consume less power and last longer than traditional rotating disk drives at a comparable price.
Meanwhile, the company is sitting on a pile of cash. The company has $127 million in cash, thanks to its 1995 initial public offering and a second stock offering last November. SanDisk has no debt.
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Write to Carrie Lee at: carrie.lee@news.wsj.com
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