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

To: Art Bechhoefer who wrote (24662)	1/22/2004 11:09:24 AM
From: Dave	Read Replies (1) \| Respond to of 60323

Art: I think you are "reading" a little too much into my comments regarding margins and patent protection/barriers to entry. Typically, companies that possess a "barrier to entry" such as a patent, manufacturing capacity, etc. in an industry enjoy higher margins compared to other companies in that same industry that do not have a "Barrier to entry" or whose "Barriers to entry" are not as strong, all else equal. There are some exceptions to the rule, though. SanDisk, as far as I can tell, does have higher margins than Lexar and the "market" is taking it into account/valuing given SanDisk's relative "premium" valuation to Lexar. While you may not agree with the relative size of that "premium", I believe that we both can agree that SanDisk trades at a premium multiple to Lexar because of its advantages. Yes, SanDisk did guide for lower margins and the cause of this decline are the start-up costs associated with a new fab. And while SanDisk did speak about competition and why they believe that they will continue to be the market leader, these new entrants could in the long run drive down returns. Therefore, yours and the company's rationale does appear to be plausible, but there could be other drivers causing GMs to drop. Remember, the market does not like to hear about falling margins and, as competitors enter, will margins continue to fall? Will SanDisk have the volume to offset the volume declines? These are questions that no one knows the answer to. I would be most fearful of Micron which is pretty good at fabricating DRAM. However, sometimes you can be very efficient at manufacturing but the dynamics of your industry destroy returns. As one Airline Industry executive said, "You are only as smart as your dumbest competitor" Next, regarding "brand awareness", I think it is fairly safe to assume that there is little "brand awareness" for Flash vendors. For example, when you go to Best Buy, there is a wall with flash chips from different vendors, i.e. SanDisk, Lexar, PNY, Kodak, Fuji, etc. and there is little or no attempt for these vendors to differentiate themselves over their peers. Basically, if you look at all these products and don't know a thing about Flash Memory, one would be lead to believe that this is a "commodity" product just like DRAM. As noted by a prior poster, Lexar has attempted (and I stress that) to differentiate itself by showing the relative read/write speed of the card. Of course, this type of strategy is good, but Lexar will get few long term benefits from it since it is easily copyable. A brand-awareness strategy, IMO, is a good and obvious plan for SanDisk to pursue. The problem, however, is that this type of strategy will suck up resources that could be allocated towards a more "tangible" asset such as a new Fab. Building up capacity, which Intel did and continues to do, is a deterrant for competitors to enter a market. Sorry for rambling. Best regards, Dave