The next three years should tell the tale for SanDisk. It could be a wild ride. Nothing new there.
What makes the next three years special is that in each year there is a specific challenge, which if met, will pay big dividends. If SNDK were to hit on all three, well, that would be kind of like hitting the proverbial jackpot.
On the other hand, if SNDK stumbles, the dream could be over.
2010 is looking like a gimme for sustained profitability, as much as there are gimmes in this business, in this economy.
The stars seem aligned for profitability driven by unprecedented strength in pricing underpinned by demand and constrained supply.
Demand is being driven primarily by smartphones, where both embedded and removable NAND products are the only game in town.
Supply looks like it will be constrained through 2010. The NAND business is like an ocean liner. It takes a while to adjust speeds. Right now the brakes are still on. New fabs are on hold and new equipment purchases are modest.
The graphic below, from the 9 Sept 2009 BoA/ML report sums up the profitability dynamic nicely, in the broadest terms. As spot prices (and contract prices-not shown) have trended up, cost reductions continue down. On the left of the graph is a dashed oval titled “Large loss,” centered approximately over Q4 2008/ Q1 2009. This oval nestles in a gap between the spot prices and the cost curve.
On the right is another gap, representing “Large gain.” That’s where we are now.
Not much has changed since September. Spot and Contract pricing are holding up as shown in the pricing graph below from December’s SNDK Barklays’ presentation
Q4 should be a blow-out, on the upside.
Q1 2010 deserves its own post as ground zero for the somewhat schizophrenic split between the SanDisk bears and bulls.
The bears seem to expect a double dose of bad news. First for the bottom to fall out of NAND pricing- pummeling GMs; Then for SanDisk’s L&R revenues to fall dramatically with the new Samsung agreement.
I am expecting a far rosier scenerio, where strong GMs and healthy L&R revenues in Q1 set up a most profitable year.
This isn’t to say that Q1, or Q2 for that matter, won’t be a bit choppy. SanDisk expects as much. See the graphic below, also from Barclays, which shows Q1 and Q2 as slight oversupply. None of this is new.
Q1 and Q2 typically suffer. What is different this time around is that there doesn’t seem to be a painful inventory overhang and educated expectations are for a shortage for the rest of the year.
At some point mid year 2010, I am expecting NAND producers, including SNDK, to start talking publicly about ramping up production for the next big market- SSDs.
Just because the mass consumer market for SSDs has been a long time coming, doesn’t mean it won’t be a monster. 2011 looks like the year when SSDs finally take off.
Ramping quickly, as shown below, Garter expects SSDs (“Computing”) to become the next Mega-Market, rivaling mobile by 2013.
By 2011, NAND production will be in the 2X nm node- 24 nanometers for SanDisk. At 24 nanometers, SanDisk feels it will be able to hit the price points needed to sell SSDs and generate healthy GMs.
Those like SanDisk with captive NAND supply should be in the SSD driver’s seat, but only if they have viable SSDs to sell. There-in lies the rub for SanDisk.
While SanDisk’s modular SSD, pSSD, targeting netbooks, seems to be doing just fine, SanDisk’s G3 MLC SSD product appears to be having its problems. Announced with much fanfare at CES in January 2009, the G3 was going to “achieve, with 43 nm NAND MLC, the kind of performance, reliability and endurance that has hitherto required much more costly SLC NAND.”
By Q2 2009 Eli was already backpedalling:
“To date our performance in the notebook PC market has been less than stellar, and we have some catching up to do. We are late to market with the G3 MLC SSD product that we showed at the January CES and we are evaluating our G3 product strategy.”
By Q3 comments continued decidedly mixed. Interesting nonetheless:
“Tristan Gerra, Robert W. Baird: Just to follow-on on SSD, there seems to be an increasing gap between overall NAND flash reliability and what the tier one PC OEMs are demanding in terms of SSD performance, so in addition to the pricing issue currently, how do you reconcile the two if you see SSD ramping a year from now in the mainstream?
Eli Harari: Yes, there is an SSD gap, if you will, and there is definitely not all SSD product created equal or are equally reliable, and the OEMs are very, very good at testing, properly testing SSD devices. So the industry is in the early stages, early, if you will, still in its infancy. You’ve seen the issues that we’ve had with our third generation [G3] but frankly I believe that all the major manufacturers of SSD are seeing similar birth pains. But we know what the issues are and we know what needs to be done architecturally, and NAND will be up to the task. I have no doubt about that, that on a monthly basis, we are making progress, improving our performance and our quality and reliability and so do our competitors.
The operating system guys, Windows 7 is beginning to be much more flash friendly, so I don’t see that reliability or quality or endurance as being in anywhere near a show stopper for SSD. They are just kind of more birth pains, and I would expect that by some time in 2010, those issues will be mostly behind the industry, including ourselves.”
If SanDisk comes through with a viable best-priced MLC SSD in 2010, the stage will be set for the next leg up in 2011. On the other hand if SanDisk isn’t up to the task where others are, a price will be paid. SanDisk, and its shareholders, will suffer.
Just desserts. Its not like SNDK didn’t see this one coming.
So let’s just say that SanDisk is able to achieve the sustained profitability required to underwrite the volume ramp required for SSDs, and SanDisk has a viable best-priced SSD in the market in 2011 when SSD’s take off in that consumer mega-market, what could be next?
How about the end of the road for flash memory as we know it?
The clock is ticking. NAND at 24 nm looks viable, but the next node down looks tough.
The jury is out on which technology will step up as the successor to NAND. The best known contenders are Phase Change Memory, MRAM, Nanotubes, and Milipede, but there are many others, including Sandisk’s Matrix 3D.
SanDisk has placed it’s bet. The long-term future of their memory business is riding on a scalable and stackable cross-point diode array technology developed by Matrix Semiconductor which SanDisk acquired in 2005.
The good news is that Matrix 3D is shipping commercially today; the basic technology is understood; and it can be manufactured with traditional CMOS processes using standard equipment and materials. It also appears to be scalable below the limits of NAND with higher bit scaling equivalencies.
The not-so minor problem is that today’s Matrix 3D is only one time programable (OTP). It stores data just fine, but only once. That data will be retained for 100 years, but the chip is not re-programmable.
The challenge is to turn this OTP technology into read-write (R/W). With Toshiba recently on board and now contributing to Matrix 3D R&D, I expect things are moving right, along at least on the lab side.
Both Toshiba and SanDisk have said that 3D R/W is the likely tech for the 10ish nm generation.
The slide below tells the story, at least from SanDisk’s point of view.
Give SanDisk credit. Back in 2007, Eli said that he thought Matrix 3D had the potential to eventually replace all NAND, in 5 to 7 years- 2012 to 2014. At the time 2012 seemed like the far distant future. Not so far off now, and Eli is still talking 2012.
Interpolating, 2012 should be the year we hear that Matrix 3D R/W is the real deal. If there are no announcements, the silence will be deafening.
So, on the eve of 2010, three big years are looming. Each has its own promise and challenge.
Personally I am most comfortable with 2010. Sustained profitability looks within reach. I am guessing a big run lies ahead, as analysts and Mr. Market get up to speed and realize that SanDisk is going to clean up in 2010.
I am relatively confident that SanDisk will come through with a viable MLC SSD for the mass market kicking in in 2011. I am guessing that SanDisk has surprises up its sleeve. Top of the guess list- A viable X3 MLC SSD.
Judging from the Matrix 3D patent parade, I’d say that SanDisk has a real shot at having the successor to NAND all locked up, but lots of other folks will have their say.
I’m pretty much all in right now. My cunning plan is to take profits along the way each year as this story plays out- and then reinvest accordingly. Of course, easier said than done.
I continue to see SNDK as a volatile stock potentially wonderfully positioned as a major player in solid state digital storage. The volatility though, is enough to drive the most sane crazy.
That said, the seeming madness along the way may offer opportunities to those who can live with the mood swings.
The next three years, should be interesting times.
Best wishes to all for the new year.