SanDisk Preps Secret-Weapon Chip

"For SanDisk to move in this direction seems to imply that they're at a level where they can start developing this for production in three or four years," says Wong.

That's not around the corner, but it could be just in time for SanDisk.

Flash memory makers like SanDisk have built giant businesses by winning a prime role in popular consumer gadgets like smartphones and Apple(AAPL Quote) iPods. Smaller and more energy-efficient than mechanical hard disk drives, flash memory chips provide an ideal technology to store the digital photos and music cherished by consumers.

Since 2002, SanDisk's annual revenue has surged from $541 million to $3.9 billion in its most recently ended year, while headcount has grown more than five-fold to more than 3,300.

But SanDisk's stock has plunged more than 40% this year, as an oversupply of flash chips has depressed prices and eaten into its profit margin -- a fate suffered by virtually all players in the volatile flash market including Micron(MU Quote), Intel(INTC Quote) and Samsung.

SanDisk shares closed Thursday at $18.43.

More worrisome to SanDisk and other flash chip firms in the long run, however, is the potential that flash chips -- which typically increase storage capacity by shrinking the size of a memory cell -- are nearing the physical limits of miniaturization. By 2011 or 2012, many engineers believe that NAND flash will reach a scale at which today's semiconductor materials can no longer be further reduced -- a technological dead end.

Thus the race for alternatives: Toshiba, Samsung, IBM(IBM Quote) and Macronix International are all developing their own versions of 3D memory.