Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (20162)	4/22/2001 10:43:12 AM
From: Art Bechhoefer	Read Replies (2) \| Respond to of 60323

Paul Senior--One of the biggest changes in SanDisk that has occurred since its low back in 1998 concerns the value of its intellectual property. In 1998, investors had reason to believe that CF was covered well enough by patents to allow SanDisk to dominate the sector through the use of licensing and royalty agreements. One of the first cracks in the IP wall occurred when SanDisk cross licensed its patents with Intel, allowing SanDisk to take advantage of the double density technology perfected by Intel, but also allowing Intel to enter the flash memory market without having to pay royalties to SanDisk. Another major change occurred when SanDisk decided to form an alliance with Toshiba, resulting in the FlashVision joint venture. In the process, what investors have seen is a company with insufficient intellectual property of its own making agreements with other companies so that the end result is a company producing what has almost become a commodity. As we all know, particularly from the weak prices for flash memory units now, commodity companies are continually subject to pricing pressure, and only the lowest cost producer has a real chance of success. I think that as investors we are forced to concede that SanDisk has become a commodity company, though with some intellectual property that may give some of its products a performance edge. The alliance with Toshiba, a company with a very good history for producing high quality products (e.g., laptop computers) at low prices assures that SanDisk will probably be the low cost producer (sharing the market with Toshiba). If this assumption is true, then investors can focus on the inherent growth in the various markets for flash memory and have a certain amount of confidence in the fact that SanDisk is (1) the only pure play in removable flash memory, and (2) likely to make a decent profit over the next two or three years of rapid growth for this market. I can see earnings growth averaging about 30 percent over the next two or three years for compact flash. It's hard to predict where SDMC will go, but the number of consumer product companies that have accepted this format suggests an initial earnings growth rate close to 50 percent over the next couple of years. If the SDMC or MMC eventually finds a place in storing individual health data, then I would be extremely optimistic because this is an application that is not dependent on consumer sentiment as much as it is on overall growth in demand for health care services. The involvement in embedded flash technology through an agreement with Tower Semiconductor is one area that I am unable to evaluate. We know there are a number of major applications from cell phones to set top boxes to routers, and even to the control of household appliances from remote locations. But we also know there are some really major competitors here, such as SSTI and AMD. It is a big question in my mind, but the only good thing I see here is the amount of subsidy they got from Israel to build the factory. This should help considerably with return on investment. Putting all these factors together, one is left with a company that is essentially a commodity producer, with a couple of promising areas of growth that are not entirely consumer dependent. The most that any of us can say with any certainty is that the company has better earnings growth prospects than average, probably better than average management quality, and probably sufficient technology and skill to remain a low cost producer. These factors combined should justify somewhat higher PE's, price to book value, and price to sales ratios than for typical technology stocks. But at present, these fundamentals are somewhat below what we see for other tech companies. Art