Demand Concerns Threaten a Flash Fizzle

There is plenty of new manufacturing capacity in the pipeline. According to industry research firm iSupply, Samsung, the world's largest flash-maker, began producing flash chips at one of its few remaining DRAM-only fabs in the third quarter of 2005.

In addition, a new 300mm fab, slated to come online in the second half of this year, is expected to be entirely dedicated to flash production.

Hynix, the No. 2 player in flash, is expected to transition part of its DRAM fab to flash production this year. Moreover, IM Flash, the new joint venture between Intel(INTC Quote) and Micron Technology(MU Quote), is expected to aggressively ramp up NAND flash production in the second half of the year.

The move has raised flags among some industry watchers.

"We are taking a more bearish view on the NAND environment in C07, given a likely steep ramp of capacity from IMFT (Intel-Micron), and Hynix (which is spending $3.6 billion in CapEx in C06)," wrote Deutsche Bank analyst Ben Lynch in a note to investors lowering his earnings estimates on SanDisk.

Deutsche Bank or an affiliate owns 1% of more of SanDisk shares and holds a trading position in SanDisk.

Though Lynch is bullish on the medium- and long-term outlook for the NAND flash segment, "the market is too focused on this secular outlook, and not the commodity aspects of NAND flash," he writes.

Chipmakers have become much more disciplined in recent years when it comes to adding manufacturing capacity. But with flash memory market boasting the highest growth rates in the semiconductor industry -- flash sales were up 79% year over year in October, according to the Semiconductor Industry Association vs. an 8% decline for microprocessors -- the temptation to cash in may prove hard to resist.

"So far demand has been growing faster than people can throw capacity at it," says Semico's Handy. But he acknowledges that there is a risk that could change.