Flash! Tech expert eyes Sandisk (SNDK)

"NAND Flash is just beginning to scratch the surface of what will prove to be its biggest potential application - the replacement of hard disk drives," says Paul McWilliams in a review of Sandisk (NASDAQ: SNDK).

In Next Inning, a sophisticated service, deisgned for experienced, tech-savvy investors, he says, "My outlook for SanDisk during the second half of 2008 is bullish."

"NAND Flash, like hard disk drives, is designed to store our data, which can be word processing documents, spreadsheets, songs, pictures, videos, etc. -- anything you would normally store on your hard disk drive. 

"And, since the day is coming when it will be common for people to store entire video collections on a PC or home storage system, the appetite for data storage is ìinsatiable.

"The primary markets that are waiting in the wings for NAND Flash are the markets currently served by hard disk drives; hard disk drives will move on to markets with larger demands like the emerging home storage markets for video, that cannot yet be economically addressed by NAND Flash, but will be eventually insatiable. 

"What makes this particularly interesting is that the weakness we've seen in NAND Flash pricing will open these hard disk drive applications sooner than we would see if NAND pricing was following a more orderly curve. 

"We should see the balance of supply and demand for NAND become much more favorable for suppliers as we move forward. Based on this view, my outlook for NAND suppliers such as SanDisk during the second half of 2008 is bullish. 

"If we look at other memory technologies like DRAM, SRAM or even NOR Flash, the elasticity of demand in an atmosphere of falling prices is substantially less than it is for NAND Flash.

"This is because NAND Flash is in the infancy of its demand curve and other memory technologies are at fairly mature positions in their demand curves.

"The reason for this difference in elasticity is really pretty simple; if DRAM prices fell in half tomorrow, few people would rush out to buy twice the memory they already have in their PCs (the number one demand source for DRAM).

"However, if the price of NAND Flash fell in half it would put it that much closer to opening new markets that are substantially larger than all the current existing markets combined.  

"In other words, a 50% reduction in DRAM prices wouldn't open any new markets of substance or even approach doubling demand from existing markets. However, for NAND Flash the prospect is that there are new markets waiting for certain price points that are larger than all the existing markets.

"As it stands today, weíre seeing NAND Flash Solid State Drives (SSD) move into niche laptop applications where users are willing to pay for faster speeds, lower power consumption, lower weight and substantially greater ability to handle physical shock.

"I believe weíll see this begin to spread to mainstream laptops by the end of 2008 and become fairly common by the end of 2009. 

"We're also seeing some early adoption of NAND Flash at the high end of the PC food chain in some server and workstation markets where power consumption is a growing concern.

"Overall, consistent with the predictions we first outlined in 2006, NAND Flash has developed traction in niche markets and appears to be well positioned to significantly increase its penetration during the next year.

"I would add that expect SNDK to report dismal Q2 results and most likely to guide with low visibility (conservatively).

"Based on that thinking, I'm playing both sides of the street by establishing a modest position here and standing ready to buy more on a dip that I think could easily go to $15 area. However, my thinking is that by the end of Q3 both visibility and the balance of supply and demand will have improved.

"Bottom Line for SNDK:  My belief is that we are rapidly approaching a time when the balance of supply and demand will favor NAND Flash manufacturers. When this happens, I expect there will be a sharp rise in the price of SNDK and my target of $40 will be realized."