Chips: Goldman Downgrades SanDisk; Turns Bullish On Texas Instruments

Goldman Sachs analyst chip analyst James Covello late yesterday cut his rating on flash memory card seller SanDisk (SNDK) to Neutral from Buy, citing the stock’s “full valuation,” while also lifting Texas Instruments (TXN) to Buy from Neutral. With SNDK is now near his $24 price target, Covello writes that there is now greater opportunity in TXN, “driven by margin expansion in 2010, secular growth driven by analog share gains and attractive valuation at 13x normalized EPS.”

Covello writes in a research note that he still thinks NAND fundamentals wil continue to improve, with capacity tightness driving stable ASPs and margins. But he also says that the the real value in SNDK’s business is the royalty stream, since the product business does not generate positive earnings over the course of cycle. He thinks the current stock price is about in line with the fair value of the royalty stream, leaving little incremental upside.

As for TXN, Covello asserts that the market under-estimates the company’s margin potential for next year and 2011 - and also under-estimates the potential for market share gains over the next 2-3 years. He thinks the company can get close to its target gross margin of 55% in the 2010 second half, driven by higher sales, with a push above 55% possible in 2011.

Covello lifted his price target on TXN to $29, from $27.