|SanDisk's hour will come|
The smartphone boom has created massive demand for NAND flash memory, but it's Apple that is creaming off the profits. That won't last forever.
9 April 12 17:35, Shlomi Cohen
Samsung Electronics released estimated first quarter results on Friday, from which we learn that, as far as smartphones are concerned, there are just two companies at the top: Samsung, and Apple (AAPL). All the rest trail a long way behind. Strong sales of smartphones and tablet computers in its booming Galaxy range drove Samsung to a record operating profit of $5.15 billion for the first quarter, 16% above market estimates.Apple and Samsung, which are sparring in court over intellectual property, are gearing up for the great smartphone battle, which will probably begin the in the third quarter, when Apple comes out with its iPhone 5, expectations of which are sky high, while rival Samsung launches its Galaxy 3. Meanwhile, last week, investors sent both stocks to all-time record peaks, but if you look at market cap, it turns out that Samsung, which up to the fourth quarter of 2011 outsold Apple in smartphones, has a market cap one third of that of its competitor, which has soared to $590 billion.
I have always held the view that, in addition to the smartphone makers, it is worth investing in the ammunitions suppliers for this global war as well, that is, in the makers of the main components. This worked beautifully for me with Broadcom (BRCM), which has risen 27% so far this year, but for the time being it isn't working with SanDisk Corporation(Nasdaq: SNDK). Last week, the company, the only developer and producer in the world that deals only in NAND flash, which is the sole technology suitable for data storage in smartphones, tablet computers and ultra-thin laptops, issued a profit warning for the first quarter.
This of course raises the question, what isn't working at the company founded by Dr. Eli Harari, who told me in 2007, with the launch of the first iPhone, that Apple would generate a huge revolution in the telephone market in general and in NAND flash in particular?
The simple answer is that there is indeed undreamt of demand in the NAND market because of the huge success of Apple and Samsung, but in practice, up to now, it is only Apple that has been lapping up the cream on the stock market, to the exclusion of the manufacturers. It wasn't for nothing that in October 2010, Steve Jobs joked "We love flash memory" when he was attacked for his refusal to allow Adobe (ADBE) flash software for viewing video content on Apple devices.
When Jobs decided that there was no room in his world for flash memory cards, meaning that there would be no suitable slot on Apple devices, and that anyone who wanted expanded memory could buy a device that cost $100 more for the additional flash, he in effect snatched the cream of the NAND flash components for himself, because was buying for $20. As the buyer of one third of the world's entire flash memory output, Apple manages to cause a price war between the four producers, and, as mentioned, to reserve the cream for itself.
SanDisk's hour is close
Still, I wouldn't flee from SanDisk, as recommended by Jim Cramer on CNBC last week, when he described the company, mistakenly to my mind, as a commodity component producer, and, rightly, as a stock for hedge fund games. I wouldn't run, because the NAND flash market won't remain Apple's private paradise for ever, and Apple itself knows that very well. It therefore rushed to buy Israeli flash memory company Anobit, which worked for Samsung.
In addition, I believe that a company like Apple, which next year will approach annual sales of $200 billion, and which has NAND components in all its products, must be worried about a world shortage. When that happens (experts see it happening next year), its toughest competitor Samsung will have all the components it wants, because it produces them itself. Even if Apple has enough components, their price will soar, and it gross profitability will be hit, and then the cream will flow back towards the manufacturers themselves, including SanDisk.
The more complicated that smartphones, tablets, and soon Ultrabooks, become to develop, because on the one hand their performance zooms, but on the other hand costs have to fall in order for them to stay competitive, the closer we get to the moment when flash companies like SanDisk, which know how to provide optimal solutions, will come into their own. It's not for nothing that SanDisk products are even found in smartphones by Samsung, such as in the LTE version of the Galaxy Nexus sold through Verizon Wireless, for example, which, according to the website Chipworks, has SanDisk's 32 GB solution inside.
Published by Globes [online], Israel business news - w