RealMoney Silver - SanDisk Has the Best Growth Prospects in Memory

SanDisk Has the Best Growth Prospects in Memory
By Cody Willard
RealMoney.com Contributor
8/27/2007 3:54 PM EDT

I bought some more long-dated, out-of-the-money SanDisk (SNDK) calls today. SanDisk is in a lot of businesses, selling MP3 players and other consumer gadgets, but the real driver of the company's fundamentals -- and its stock price -- is simply the NAND market.

Flash NAND memory is the future of most applications that require any storage of data, especially those that require relatively less memory than whatever is considered "heavily memory intensive." For the former, picture the mini-MP3 players at Best Buy (BBY) or the limited memory capacity of most new smartphones. For the latter, we're talking about PCs and their data and backup.

Whether NAND memory poses a threat to hard-drive dominance in the PC market has been a topic of much debate and analysis lately. The short answer is that, yes, of course, NAND poses a threat.

That's in large part why Seagate (STK) announced this week that it's going to try to figure out how to build NAND-type products to complement its hard-drive business. The market for NAND memory is undergoing secular growth as well as cyclical growth and growth in market share.

Of course, the NAND market isn't exactly a panacea of profit margins, though, because memory is every bit as much a commodity as say, steel or oil, and all commodity markets are tough to profitably navigate. Seagate is certainly not going to have a bunch of mind-blowing new gadgets rolling out in the next year to differentiate itself and boost margins.

No, Seagate, SanDisk, Samsung and everyone else who sells memory is increasingly beholden to the simple pricing of memory. We value oil by the barrel; we value gold by the ounce. NAND and hard drives and any other type of memory that is invented to store the order of the zeros and ones that make up the world's computerized content eventually are going to be priced almost entirely by the cost per gig of storage. (Does this analysis mean that, unfortunately, we'll have to sit through hype each week when the government releases its "storage inventory" levels, like with the oil inventory or eyeball growth from years past?)

Given that the memory marketplace will become even more classically commodity-like and that the prospects of any company and its stock in the business is contingent mostly on the pricing of the underlying commodity, we need to focus on the pricing of memory. Above I said that the NAND market is undergoing three kinds of growth:

Secular. The applications for memory and requirements thereof continue to grow steadily, and will for many decades to come.

Cyclical. The impact of Microsoft's (MSFT) memory-intense Vista OS and of the iPod, the booming economy that we're still living in, are cyclical factors helping the market for NAND grow.

Market share. NAND has got about 0% of the PC market share for storage, and just a fraction of the overall data storage market. Both percentages are going to trend only higher for years and years.

That's largely why I've been a SanDisk long off and on for the last few years. And with all three factors contributing to make the pricing for memory favorable for the commodity vendors such as SanDisk for the next few months and/or quarters, I'm net long again. I'm also using the calls and keeping it small still because I don't like the overall risk/reward of being long this market overall right now.