JP Morgan etc

Greetings all. Am still unpacking from my Zion Park vacation, so am going to keep this week simple.

Zion is definitely world class. For those who haven’t visited, it’s worth the effort. Towering multi-colored sandstone cliffs with great hiking. Had hoped to get into the famous Zion Narrows, but the Virgin river was up over 250 CFS, so that one will have to wait for another year.

The closest airport is Las Vegas, only 2.5 hours away. Curiously Las Vegas reminded me of Phoenix. Desert country with multi-lane freeways and low rise urban sprawl. The Las Vegas Strip though, has its entertaining surreal qualities.

After reading the sensationalist press about Eli’s comments at the JP Morgan Technology conference, decided a close listen to the original article would probably be worthwhile.

It was. To my mind this was the proverbial tempest in a teapot-  a major fuss over not much. At JPM, Eli covered familiar ground. Not particularly a pretty picture, but this has been known for a while a now.

I transcribed a few sections included below. I focussed primarily on SSDs as this will be a critical market for SanDisk. True enough Eli says that SanDisk is behind on MLC SSDs. But this is in the context of a tradeoff.

SanDisk killed its 56nm MLC SSD project in order to push hard on its 43nm MLC SSD. Behind now to be ahead in 2009. Makes sense to me. SanDisk though still has prove it has the right stuff.

Toshiba appears to have taken the other path. Its MLC SSD announced late in 2007 is 56nm.

Eli also explains that the SNDK SSD shipping today is the old msystems’ industrial SSD design which uses 70nm SLC NAND provided by others.

Eli implies that x3 MLC NAND will be suitable for SSDs (eventually). My guess is this will be a late 2009 43nm x3 story.

In what might be the most bullish part of Eli’s JPM presentation, he refers to the SSD market as “the ultimate price elastic market” which “represents a tremendous opportunity.”  Eli goes on to say that:

The assumptions that you see out there. the market studies from the very very highly respected independent marketing research firms could easily be off by a factor of 2 to a factor of 5 over lets say 2011 to 2013, 2014 being on the conservative side. I think that that opportunity is really [pause] if you add up [look at] the hockey stick that we expect. The tipping point sometime in the next two to three years it will happen for the SSD.  I think that it is really going change entirely the dynamics of the market and will definitely require the kind of scale that is unprecedented for the flash memory industry.

Below, I’m also including excerpts from the recent 16 May 2008 UBS SNDK report and Lazard’s 20 May 2008 Asia Tech Tour report.

In his Lazard report, Dan Amir notes that Samsung is to begin to produce 3-bit NAND at the end of 2008.  Whether Samsung actually ships x3 commercially this year remains to be seen. Samsung typically talks a lot.

In the long run I expect all the big NAND players will have to move to x3 to remain competitive. By 2012, 3-bit per cell NAND is forecast to account for 52.8% of NAND flash memory bits, followed by MLC NAND at 25.4%, 4-bit/cell NAND 16.6% and SLC NAND 4.4%.

SanDisk is shipping x3 now.  Time will tell how the others do.

SanDisk and Toshiba have been remarkably open recently about their all bit line architecture (ABL) which seems to the key to the outstanding performance of their x3 NAND which apparently is equal to other’s x2 at 56nm.

**** Excepts from JPM below ****

05.19.08 JPMorgan Technology Conference
Eli Harari
Just flew in from Asia, a “little bit under the weather”

Eli: … The third market is the SSD. Of course computing. That market has not yet started. I think the crowd is just showing up. Buying their popcorn and waiting for the first ball to be thrown.

That market [SSD] potentially [pause] I’m very excited, the more time that passes the more excited I am about this market because I think that it is the ultimate price elastic market and represents a tremendous opportunity both in the enterprise, the desktop and the notebook computer to drive demand at levels that have not been seen up to this point certainly not in the consumer space.

The assumptions that you see out there. the market studies from the very very highly respected independent marketing research firms could easily be off by a factor of 2 to a factor of 5 over lets say 2011 to 2013, 2014 being on the conservative side. I think that that opportunity is really [pause] if you add up [look at] the hockey stick that we expect. The tipping point sometime in the next two to three years it will happen for the SSD.  I think that it is really going change entirely the dynamics of the market and will definitely require the kind of scale that is unprecedented for the flash memory industry.

Question: OK, we’ll come back to it in a second, but you didn’t mention the MP3 players. What is happening?

Eli: MP3 players are in the consumer electronics space of course. Yes its a nice size market but our view is that eventually it is all going to be in cell phones.

[skipping discussion of SanDisk as storage-centric company] that will allow the obsolescence of optical disks, optical media, not necessarily building the DVD player.

Question: On the SSDs for just for a second. This year it seems like its kind of an experimental phase. You’ve talked of the need to bring out a controller for MLC and that that will be near the end of this calendar year? Am I right first of all and are you on target for bringing that controller out and then presumably it will be applied to your 43nm product and the 3x 56nm?

Eli: Yes you are right. You are correct. We have said that we are late to the market for the MLC SSD product and that we expect to start sampling MLC products with our controller by the end of this year. We are still on track for that.

One of the reasons why we are late by the way is that we killed an internal project that was based on 56nm and redirected all our efforts to 43 nm because we think that is what we need for 2009. So we took our hit up front and hopefully this will turn out to be the right decision when the market really grows.

So we think that  2009 is when things are really going to start warming up. Maybe not heating up, but certainly warming up and I think that revenues for the industry in 2009 will be higher than what most people expect, certainly by the second half of next year and I think one of the main differences from everybody’s expectations, in my opinion, is the enterprise space.

You are going to start seeing the adoption of flash at a much faster rate than what most people thought. Most people expected the enterprise because it is so much more demanding than a notebook computer to follow the adoption in notebook computers and then only then, embrace SSDs in enterprise systems.

In fact what we see is that there is a huge amount of activity in the enterprise space. It is not price driven. It is very much performance driven and its a number of niche players that could do very well in specific markets. We think that this market could actually do quite well starting in 2009 and we’ll [or “will”?] become a factor.

Question: Does your brand matter when you go to SSDs? Ultimately an OEM business.

Eli: What matters is precisely that this is an OEM business. An OEM business. An OEM like an HP or Dell is very very finicky and does a great amount of qualification, internal qualification, and are not prone to just go and buy a controller from some controller company that doesn’t really understand flash and then buy flash from somebody else and then slap it together.

We are already working with a number of these very large OEMs and when a SSD drive fails and you get a return from the field, boy, they really want to know and we want to know. But they want to know as much as we do, exactly what happened. Exactly why it failed and a tremendous amount of reporting and analysis, failure analysis, that does not exist in the card business.

In the card business, if it doesn’t work, throw it away. Or get a return, but nobody is going to ask you.

Question: So based SNDK inside is a strong internal brand solution?

Eli: It is a vertical integration that really makes sense in that space, because people really understand the value. OEM really understands the value You design the flash chip. You manufacture the flash chip. You design the controller and you manufacture it. You tested the whole thing. You built it. Its a different kind of animal than one just slapped together…

Eli: Let me repeat your question. The delayed controller, is it because of reliability, or performance or [pause]? Anyway. We acquired msystems and msystems has a very good SSD that is an industrial design. It is designed for the industrial market. Always has been and was working with SLC of course.

And what we are shipping today is SLC. It is the same design. Its not our SLC because we didn’t want to re-qualify the whole thing. So to go from that- 70nm SLC solid state industrial design that is applicable to a notebook computer. Clearly not optimized to a 43nm MLC that is optimized for a notebook computer requires a tremendous amount of development.

Its not rocket science. There are no imponderables there. We know what we need to do. We just don’t have enough resources to do it all any sooner than we can and I just hope that we meet the schedules that we have today because it is a very tight schedule.

[inaudible question from the audience]

Eli: The question is: When your cross-license expires with Samsung how strong do you feel your IP is three years from now and will you have to reduce the royalties that you receive from Samsung?

What we said, I said at the analyst day February 26 that we would like to negotiate a new license with Samsung. We think it would be in the best interests of the company [Samsung]. To the extent that we come to a resolution on a reduced cross license, very likely you should expect that the royalty rate would be lower than what we have now. That is what happens when you come to negotiate an agreement. If you can’t come to that kind of agreement, you get into the litigation.

The strength of our IP we feel is very substantial, enormous. As the industry is moving more towards system solutions, it gets even stronger.

The industry is going to embrace SSDs. We think that we have very substantial IP there. Not the least of which we also have the addition of msystems’ IP in SSDs.

If the market goes beyond NAND to technology such as 3D, we have very fundamental IP over there.

If the market moves to 3 bits and 4 bits per cell, we think we have certainly very powerful IP. In the case of x4, we have the most fundamental IP.

We have it pretty well covered, because we have stayed very focused.  We have about half the company, well over 1000 engineers that do nothing but think about how to improve flash storage. We don’t think that anybody even comes close.

We don’t think anyone even comes close. That doesn’t mean we won’t have to fight for it. We’ll see. I hope not…

[inaudible question from the audience]

Eli: [repeats question] When does the current agreement with Samsung expire? When do we expect to sign? and will we issue a press release?

The agreement expires in August 2009. I cannot comment at all about whether or not we are negotiating. For sure, if and when we come to an agreement, and sign an agreement, we would expect that this would be material enough that we would definitely issue a press release.

[inaudible question from the audience]

Eli: [repeats question] In our quest to de-commoditize as much of our business, I’m putting words in your mouth, are we interested in other markets other than MP3 players?

To the extent that they have a great deal of flash memory, and flash memory is an important part of the bill of materials, we would be interested. We recognize, we have had a number of drafts (?) [forays] into certain markets where we have not had success and we recognize also our shortcomings. So from time to time, we will try and if it doesn’t work we will just [pause] The nature of our business is [pause].

I think it is very important to keep trying, but to remember your core competencies, stay close to your passion, close to your areas where you are very very strong and leverage on that instead of try to create something new.

Fanfare was beta site product we developed for delivering infrastructure for content and we realized very quickly that we were not adding value to the market.

[inaudible question from the audience]

Eli: I think Intel is doing a very good job in trying to develop solid state flash memory in more than one way- into the desktop and also the server environment. I think that they will play a constructive role in my opinion.  Independent of whether they play in IMFT or not. [note Eli is not so sure MU JV is going to last]

On the architecture side, they understand the need to speed up speed up Vista and so on.

In my opinion [Intel is] a very positive influence. There’s going to many ways to skin the cat. Turbo is one of them. Some will be more effective than others.  It will take several years for the market to shake out what really works best and what doesn’t. I’m sure there will be more than one way.

[inaudible question from the audience]

Eli: The question is how much of our depressed margins in Q1 are due to pricing in the market and how much is due to our own manufacturing inefficiencies?

I think that we are the lowest cost producer today and that our manufacturing execution is as close to as good as it comes and the issue is completely in pricing. Pricing by the competition has been very aggressive starting in December and it took our competitors to sell at below their cost I believe and we have to come close to match. We don’t have to match them, but we can’t ignore it either.

I’ve said the industry cannot continue to bring pricing down at 60% per year which is what we have seen the last two years because there is no way you can bring your cost down by 60% per year even if you are perfect. Even if you are perfect.

So I think that we execute better than most but we have said this year we expect our cost reduction to be 50% to 55% and we have also said that we expect pricing to decline by 50% to 55%.

If we are off, that will have an impact either way. Anyway, I think you understand.

[JPM: Last question for me- The operating model through the cycle. At one point it was sort of 20%+. Now we are sort of thinking of it as a 15%+ though the cycle. What is your latest thinking there. Obviously it is a much more challenging period than you may have anticipated originally. What should be thinking of as the long term business model here?

Eli: At the analyst day we projected a model through 2010 of 13% to 16% operating margins, which we are not happy with. That makes certain assumptions as far as IP income and so on. And that would require us to actually take some additional restructuring action to achieve that.

As I have said before, we are in the depth of a very long down cycle that we think is going to improve. We have been through these down cycles before. We think we are well positioned to exist in a very strong position. This is what is causing us to be optimistic.

Now I’ll tell you that in the current environment to achieve that 15% to 16% is challenging, but I will also tell you that I find those unsatisfactory for the amount of investment and for the amount of energy and passion and being #1 in the market. To only project that. Obviously we will do our best to do better than that, but right now if things continue the way they are, this is a very tough environment.

**** UBS SNDK excerpts below****

16 May 2008
UBS Investment Research
SanDisk Corp.

12-month rating Neutral *
Unchanged
12m price target US$35.00
Prior:US$24.00
Price US$33.10

Uche Orji
Analyst

Steven Chin
Associate Analyst

Increasing PT on Seasonality & New Apps

•  Increasing Price Target to $35 on seasonality and expanding NAND usage
We raise our PT to $35 from $24 on: 1) expected seasonal demand in Q2 and in Q3
that offers ASP support, 2) price elasticity driving healthy bit growth given SNDK
Q2 price cuts, 3) increased use of NAND in handsets such as Nokia N95/96,
upcoming 3G iPhone and iPhone look-alikes, 4) increasing use in SSDs for
premium notebooks and enterprise storage. Maintain Neutral rating.

•  Our view on NAND remains cautious, but see improving seasonal demand
While we expect C08 NAND fundamentals to remain soft due to aggressive supply growth exerting further downward pressure on C08 ASPs, we believe product builds for late Q2 sales, upcoming AAPL 3G iPhone builds, and expanding use of SSDs for computing could offer near term ASP support.

•  Still aggressive industry supply growth, royalty uncertainties remain risks
Recent Q1 results from NAND peers suggest bit supply growth for C08 remains aggressive (UBSe +145% y/y) at major vendors given process migrations and wafer start rates despite capex reductions. As we have consistently highlighted, the lack of clarity on royalties beyond Aug ’09 remain a LT concern given our estimate for it to comprise 97%/66% of ‘09/’10 EBIT.

•  Valuation: Increasing Price Target to $35 from $24, Neutral Rating
Our new DCF-based PT of $35 is equiv to ~1.4x P/BV (vs historical 0.8x-2.5x). We assume a WACC of 8.7% and terminal growth of 2%.

SanDisk Royalty Streams

As we have highlighted previously, the continuity of SanDisk’s royalty revenues remains a concern in the August 2009 and beyond timeframe. While negotiations between SanDisk and Samsung are ongoing, we believe downside risk to future royalty rates increase as the process gets drawn out. Due to the confidential nature of cross license agreements, exact estimates on Samsung’s contribution to SanDisk’s royalties are non existent. However, we do estimate Samsung has comprised 50-65% of royalties in recent years. Other licensees include Hynix and various adopters of the different SD card formats and USB flash drive technology.

From a royalty growth perspective, we believe Samsung’s NAND revenue growth has been a major driver of SanDisk royalties given the historic relationship. If Samsung’s royalty payment rate were to decline severely, this would impact SanDisk’s royalty and EBIT growth. The uncertainty regarding these payments remains a significant long term risk while growth potential in new royalties from other sources are still too modest to offset this in our view.

In terms of new royalty revenue drivers, Hynix remains a potential, meaningful contributor but not before x4 (4bit/cell) technology penetrates the market. Hynix currently pays a very modest fixed amount in royalty to SanDisk each quarter and we expect it to grow as Hynix ramps production of x4 in particular. We don’t expect this to happen in earnest till 2H09. This view is predicated on our own SanDisk x4 production forecasts that represent no more than 20% of total bit output by late 2009. We believe Hynix would be behind SanDisk’s more aggressive x4 production ramp rate.

In terms of USB flash drives, SanDisk’s ongoing litigation with over a dozen vendors has lead to some settlements in the past couple quarters but are estimated to be small in magnitude. Given that SanDisk holds 30-40% market share in the USB flash drive market, it is possible that incremental royalties from successful litigation could contribute meaningfully in the long run. Similarly, royalties for Secure Digital related products (including microSD) remain a promising royalty stream and is dependent on further growth from digital still cameras and penetration into handsets.

Supply Growth Outlook Remains Unchanged

After the recent 1Q08 result reporting season, our view on 2008 bit supply growth remains unchanged at present given continued capacity growth and process node migrations. Furthermore, the introduction of 3bit/cell technology by SanDisk/Toshiba in Q2, and Micron/Intel and potentially Samsung and Hynix in late 2008 lead us to believe upside risk to industry supply growth estimates is possible. We continue to expect 2.2% oversupply in Q2 followed by modest undersupply of -0.6% in Q3.

ASP Trends Offer Valuation Support

Given the influence that ASP trends have on product margins and hence profitability, SanDisk’s share price volatility has often tracked ASP fluctuations. We are currently forecasting for SanDisk’s 2Q08 product gross margins to decline to 18% from 20.9% in Q1. Our outlook for market oversupply for much of this year leads us to believe that the company’s margins will continue to be pressured post Q2 seasonal demand.

After several weeks of weekly increases, NAND spot pricing declined 2% in the past week, approximately flat from the prior month, and up 2% quarter to date. We largely attribute this firming in pricing to seasonal demand and partly due to demand from new embedded applications in handset products. While handset form factor flash cards such as microSD and MemoryStick Micro remain a big driver of handset related demand, we believe upcoming smartphones from Apple (3G iPhone), RIM (BlackBerry Bold/9000), and HTC could also offer incremental demand. We believe this is supportive of near term demand and price trends, but still strong supply growth remains a concern given the persistent spot discount to contract pricing, especially post-3Q08.

In terms of NAND contract pricing, an 8% increase in 1H April prices has been followed by flat performance over the past month during the product build period for late Q2 product sales and promotions. While this was to be expected from a seasonal perspective and further explains recent recovery/stability in SanDisk shares, we also view the continued spot price discount to contract as having negative implications for current market supply/demand dynamics. Specifically, we believe the current 10% spot discount, which is less than the roughly 20% discount last seen in early March, indicates continued oversupply in the marketplace.

YTD Retail ASPs are Down -20%

Similar to spot and contract trends, NAND retail pricing also stabilized for much of April given that retail product vendors must source memory from either the spot or contract markets. We note that prices have begun to decline in recent weeks largely due to increased price discounting/promotional activity ahead of holidays/seasonal events (Mother’s Day, Father’s Day, school proms and graduations). Quarter to date, our Internet retail price tracker indicates pricing is down -4% and compares to our -20% forecast. Year to date, pricing is down – 20%, a slight improvement from the -23% mark reached in early April, but still below the full year price decline of -59% we are modeling for and SanDisk management’s guidance for a decline of -50% to -55%.

microSD Premium Continues to Diminish

Given SanDisk’s large exposure to the handset market from a card bundling standpoint and the company’s increasing dependence on bit growth from consumers upgrading to higher capacity microSD or MemoryStick Micro (M2) cards, we believe microSD price trends are another important metric to follow.

For much of 2006 when microSD card slots were just starting to enter the market and competition in the market was thin, we estimate SanDisk enjoyed microSD ASPs that were roughly double those of standard SD cards for 1GB and larger capacities. However, due to new market entrants, the microSD premium has shrunk significantly with 1GB microSD cards on par or at a slight discount to SD cards while 2GB cards are trending only slightly above parity with SD cards. We believe further deterioration in this premium at these capacities could weigh on SanDisk’s ability to expand margins meaningfully and would require significant adoption of even higher capacity cards to aid in product margin expansion.

Valuation

Our new DCF-based price target of $35 is equivalent to ~1.4x P/BV (vs historic 0.8x-2.5x range). This is above the ~1.0x P/BV with which we value Micron due to a premium for SanDisk’s royalty revenues. DCF changes are based on our assumptions for lower share volatility given improving NAND fundamentals due to increasing demand consumption and higher medium term EBIT margin estimate of 12.8% (vs 11.8% previously) and long term revenue growth of 10.3% (vs 7.9%). We assume a WACC of 8.7% (vs 9.1%) and terminal growth of 2%.

**** 20 May Lazard excerpts ****

May 20, 2008
Lazard Capital Markets
Industry Note

Daniel Amir

Asia Tech Tour Day 3: Memory and more memory: SNDK,
SIMO, QI, MU

Micron exploring Qimonda’s stake at Inotera.  Following our meeting with Nanya, we believe that it is highly likely that Micron will purchase Qimonda’s stake at Inotera following the recent JV establishment between Nanya and Micron. We see Micron’s wish to get 300mm capacity as the main driver. Micron is trying to position itself well in the DRAM market without spending the capex to build new fabs. This will increase Micron’s capacity by 60K 300mm wafers per month. We estimate the total cost to be in the $1 B range. Overall, we see this data point as positive for both MU and QI.

DRAM pricing continues to increase.  In our talks with DRAM module makers and producers in Taiwan, we have come to believe that the current stabilization in the DRAM market will continue in the next couple months. Industry contacts are suggesting a 5%-10% increase in the 2H of May following ~5% increase in both the 1H and 2H of June. The consensus is that the DRAM market in 2H08 will be fairly stable, as supply and demand will be balanced. These data points are positive for MU, in our view.

Major card makers balk at purchasing NAND from Samsung. In our meetings with card makers we have learned that they are reducing their NAND purchases from Samsung due to its high NAND pricing. The impression in the card industry is that Samsung will reduce NAND pricing by ~10% in the next few weeks in order to be better positioned in the NAND market, as the lack of purchasing is starting to negatively impact the company. This data point is negative for SNDK as this could potentially lead to NAND flash price declines in the next few weeks following a fairly stable market in the past two months.

Samsung to begin to produce 3-bit NAND at the end of 2008.  We were surprised to hear from one of our contacts that Samsung is to begin production of 3-bit per cell NAND at the end of 2008. Up until now, this technology has been the highlight of the Sandisk story, as that company — with Toshiba —are the only ones that have this technology.  However, Samsung’s attempt to produce 3-bit per cell NAND puts a challenge to Sandisk’s IP claim on this technology. While we do not know how this could play out, we see this data point  as potentially negative for SNDK.

Card inventory continuing to be high though improving. Current NAND card inventory is standing at 6-8 weeks, which is still relatively high though improving compared to the 12 weeks earlier in 1Q. Overall, demand from the US for June seems to be in line with expectations. This data point is negative for SNDK and neutral for SIMO, in our view.

INVESTMENT SUMMARY

Reiterate BUY rating and $29 price target on SIMO. We like SIMO given: 1) a strong 2008 roadmap, with the launch of products for embedded NAND, SSD, M2; 2) the likelihood that growth will accelerate in 2H along with a more positive NAND trend; 3) Mobile TV growth that could be significant, >50% with FCI; 4) upside from the SSD market with Dell, HP, and Asustek; and 5) an attractive valuation at 9.1x 2008E EPS, considering its YoY revenue and EPS growth rates of 30% and 22%, respectively.

Valuation and risk. Our price target of $29 is based on 14x 2008E EPS. The biggest risks we see are competition and the dynamics of the NAND flash industry.

Reiterate BUY rating and $12 price target on MU. We like Micron shares as: 1) DRAM appears to have begun an upward trend and we expect pricing to increase ~5% in May; 2) Micron is well positioned in NAND through an efficient cost structure with over 80% of capacity on 56nm; 3) cost-cutting measures and the spinout of the image sensor business could result in stronger earnings power.  Given the risk-reward scenario, we believe that shares deserve to trade at 1.4x book value, equating to a $12 price target.

Valuation and risk. Micron is currently trading at 1.0x book value, which we believe is attractive considering our sum-of-the-parts valuation leads to a valuation of $12 per share or 1.4x book value. The biggest risk in the Micron story is the timing of a rebound in the DRAM market, in our view.

Maintain HOLD rating on QI. While QI shares could be considered attractively valued at 0.4x book value, we recommend investors stay on the sidelines because: 1) QI is the weakest of the large DRAM players, in our view, and we are concerned by its negative FCF; 2) following Nanya’s agreement with MU, the Inotera JV is at risk; 3) postponement of the Singapore fab should result in market share loss; and 4) QI’s lack of NAND exposure makes it less attractive, in our view, than MU, as NAND is currently experiencing high growth and strong profitability.

Valuation and risk. QI is trading at 0.4x book value, compared with MU at 1.0x and other Taiwanese DRAM makers at an average of 1.1x. The two biggest risks we see in the QI story are the negative FCF and the viability of the Inotera JV following Nanya’s move to team up with MU.

Reiterate BUY and $40 price target on SNDK. Our BUY rating is based on our belief that Sandisk: 1) is well positioned with a cost edge over the competition (43nm and X3); 2) has better pricing and products, which should result in market share gains in Europe and Japan; and 3) should experience strong royalty and licensing growth that may contribute ~$1.30 to EPS in 2008. With a valuation of 19.6x P/E, we believe that Sandisk is attractively valued and we reiterate our $40 price target, which equates to 26x our 2008 EPS estimate.

Valuation and risk. Our valuation and $40 price target are based on sum-of the- parts analysis. The biggest risk lies in the supply-demand balance of the NAND market and whether we will see a rebound in demand later this year.

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3 Responses to JP Morgan etc

  1. Flshking says:

    Hi Savo,

    I have been reading your posts since the days of Cencomco, suejenseth, boardwalk, poofypuppy et al. I have always looked forward to your savy posts but haven’t heard from you in over a month and I hope all is well with you and your family. I have been a stallworth long of several thousand shares since the early flash days and have always added on dips. I have never sold a share (what a mistake in hindsight). I have firmly belived in FLSH’s products and IP. What changed when SNDK bought FLSH?? I was hoping you could comment on the relentless decline in the SNDK share price and if you think a SNDk has what it takes to whether this lengthy storm and return to its lofty heights.

    Thanks in advance,
    Flshking

  2. savolainen says:

    Greetings Flshking,

    Nice to hear from you.

    Recently I have been traveling and otherwise distracted. A couple of times in this last stretch, I have started posts, but for one reason or another, haven’t finished. I even had titles picked out:

    “Dog Days”; “2010” ; and “More 3D.” Hopefully I’ll get back to these in the weeks ahead.

    From my perspective, the SanDisk story is intact and the potential upside is still there- but it may take a while (2010). That said, this last stretch has been a gut check. Indeed Dog Days are here. And of course, a lot could continue to go wrong. SanDisk is not for the faint-of-heart.

    The combination of worldwide economic slowdown, and a challenging NAND market has dealt SanDisk a tough hand. Uncertainty over Samsung’s IP licensing renewal (2009 expiration) isn’t helping (understatement).

    My sense is that SanDisk has chosen to play hardball– The going has gotten tough, and SanDisk intends to emerge stronger for it. We shall see.

    As the low cost NAND producer and holder of significant relevant IP, SanDisk would appear to be wonderfully positioned for when this down cycle ends.

    In the biggest picture, trends should be SanDisk’s friends. Mobile is shaping up as promised. SSDs look poised to surpass expectations. SanDisk needs to show that it has the right SSD stuff. If they blow this one, all bets are off. FWIW, I don’t think they will, but again, its wait and see.

    The extreme upside, and pot-of-gold, is 3D. My sense is that the licensing agreement between SNDK and Toshiba hints that progress has been made. I have suspected for a while that SNDK had 3D R/W working in the lab. The Toshiba agreement would seem to clear the way for working out manufacturing issues/techniques.

    Hope you and yours are well,
    Savo

  3. Flshking says:

    HI Savo,

    Thanks as alwys for your knowledgeable and informative perspective.

    I too beleive that the best is yet to come and whie the underlying risk that Sndk will not execute exists, I beleive that the company is fundamentally undervalued notwitstanding the downturn i the economy another external factors beyond is contol.

    In the meantime, I will continue to keep a stiff upper lip (given the trend lately I might need botox to do so) and hopefully I will b abe stay clear of the deade knockout blow.

    I hope we have seen the worst (fingers crossed)

    Happy & safe travels!!

    Flshking

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