1440 Wall Street

September 3, 2008 10:15 AM EST

More bad news for Sandisk....will the stock print single digits before this ends?

NAND pricing continues to be in a free fall, with spot pricing down as much in the last two months as the entire June quarter. NAND prices for 16Gb and 8Gb are down more than 35% for the quarter so far. Given that SNDK does not have any product transition that can give it a 35% cost reduction, we believe gross margins could continue to trend at zero or negative going into 4Q08. The Street is currently modeling positive 5% gross margins. Declining NAND ASPs and bit growth could also imply downside to SNDK estimates for 2H08.

KEY POINTS:

SanDisk guided to zero product gross margins for 3Q08, with NAND ASP declines similar to 2Q08. We believe NAND prices (as shown below) have fallen as much as the entire June quarter, so far in the first two months of 3Q08. We believe this increases risk to the downside for SanDisk.

Major NAND flash and card OEMs, including Kingston, Acer, and Samsung have seen inventories increase. We believe Kingston, Acer, and Samsung each have more than two months of NAND finished good inventory in-house. In addition, we believe inventory at SanDisk is high as well.

NAND channel inventory has picked up in the last two weeks with "back-to-school" in the U.S. being softer and Europe mostly on vacation. Europe had been a bright spot in demand for SNDK in 1H08. Our checks indicate a slowdown in Europe with Exell, one of the leading brand European Belgian electronic retailers, declaring bankruptcy with the economic slowdown.

Given the high channel inventory, NAND ASPs could continue to decline throughout September, despite a modest pickup in demand with Europe coming back post vacation. We believe NAND flash ontract price, expected to reset early next week, could be down 5-10% again.

Our checks indicate Samsung has gotten more aggressive in taking market share by increasing NAND supply in a weak demand environment. Given increasing pressure on NAND pricing, we believe SNDK could see negative gross margins through 1H09.

Given SNDK at 0% to negative product gross margins most probably through 1Q09 with March quarter tending to be seasonally weak, consensus Street estimates of 15% product margins for 2009 could be quite a stretch. Conensus estimates for SNDK for 2009 could have significant downside, given current conditions in
the NAND memory space.

NAND 8Gb And 16Gb MLC Pricing Trends:

8Gb MLC pricing is down 35% in 3Q08 to date, while 16Gb is down almost 40% quarter to date. We believe price declines could extend through September, becoming a drag on profit margins for SanDisk through 1Q09. NAND price declines accelerated in the September quarter with a consumer slowdown and a drag from excess inventory. With the build season coming to an end inNovember, the window for inventory moderation or NAND flash price improvements has shrunk considerably.

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