SanDisk Not Flashy Enough

"There's nothing that's illogical about that," said Polestar Investments analyst Raj Sharma, who owns SanDisk shares. "They've always talked about pricing declines in this industry to create more demand. That's been the whole story."

Indeed, SanDisk's projected 2006 price-per-megabyte decline of 50% to 55%, is in the same range of the 52% pricing decline it experienced in 2005.

Although the first quarter is seasonally slower than the fourth quarter, SanDisk projected that the price cuts would result in total megabytes sales that are flat to up 10% sequentially. For 2006, the company expects total megabytes sold to increase between 180% and 190%.

Harari acknowledged that SanDisk was concerned about DRAM memory manufacturers converting their chipmaking facilities to NAND flash memory production. But he maintained that SanDisk's lead in production technology gave it a cost advantage over the DRAM companies.

"We will definitely use our cost advantage to drive demand to our benefit," Harari said.

Still, the company's margin forecast suggested that its aggressive price-cutting could take a toll on the bottom line. SanDisk pegged its non-GAAP product gross margin for 2006 between 32% and 35%, compared to the 35.5% level in 2005.

CFO Judy Bruner said that as lower-margin MP3 players comprise an increasingly large part of SanDisk's product mix, the company's overall gross margin levels would be affected.

According to the company, MP3 players accounted for 6% of total revenue in 2005, up from 1% the year before.

Sales of SanDisk's MP3 players quadrupled in the fourth quarter, and have the No. 2 rank in market share behind Apple's(AAPL - Cramer's Take - Stockpickr) iPod, according to Harari.