SanDisk Pummeled on Flash Chip Fears - TheStreet

SanDisk

(SNDK)

shares plunged 24% to their lowest level in five years, a day after surprising the Street with a second-quarter loss and an ugly forecast.

In its quarterly earnings report Monday, SanDisk also announced plans to delay investments in new chip factories to combat the oversupply of flash chips that has pressured prices.

While the market for NAND flash chips has been in the dumps for more than a year, SanDisk's report of deteriorating business conditions made the Street even more negative on the sector.

Citigroup analyst Glen Yeung downgraded SanDisk to a sell rating on Tuesday.

"We are throwing in the towel on SDNK shares for 2008, expecting industry fundamentals to get decidedly worse by late 2008 before potential improvements in mid 2009," Yeung wrote in a note to investors.

What's more, Yeung said, he increasingly suspects that "saturation has started to negatively impact product growth rates for USB drives and MP3 player products, suggesting a demand side bail-out may prove less probable than the Street or SNDK might hope."

The Milpitas, Calif., maker of flash memory chips said sales in the three months ended June 29 totaled $816 million -- significantly below the average analyst expectation of $906 million. At this time last year, SanDisk had revenue of $827 million.

"Our second-quarter sales were well below our expectations due to the rapid deterioration in consumer confidence which impacted our sales in U.S. retail and to handset OEMs," said CEO Eli Harari in a statement.

SanDisk's product gross margin deteriorated to 3.3% in the second quarter, vs. 18.4% in the first quarter. Harari blamed the weak profit margin to lower sales volume and a substantial inventory write down.

The company posted a net loss of $68 million, or 30 cents a share, vs. a net profit of $28 million, or 12 cents a share, at this time last year.

Excluding stock option compensation expenses as well as acquisition-related charges, SanDisk said it lost 10 cents a share. The average analyst expectation called for SanDisk to earn 13 cents a share.

Shares of SanDisk fell $4.33, or 24%, to $13.60 in midday trading Tuesday, the lowest level the stock has traded at since May 2003, adjusted for splits.

The company said it was delaying the start of the next phase of its production ramp at Fab 4 in Japan, with no plans to begin before April 2009. SanDisk also said it is pushing out decisions to invest in Fab 5 until market conditions improve.

SanDisk said it is taking the steps to slow its in-house chip supply growth to reduce capital expenditures commitments and better mange its inventory.

SanDisk, along with

Micron

(MU) - Get Report

and other flash makers, has been hurt by the glut of NAND flash memory chips flooding the market, which has led to significant price declines for more than a year.

In the second quarter, SanDisk said that the average price per megabyte for its flash chips declined 55% year over year and 15% sequentially.

Earlier this year,

Intel

(INTC) - Get Report

, which makes NAND flash chips through a joint venture with Micron, said it would delay plans to expand a factory in Singapore.

SanDisk shares were already down roughly 45% in the past two months before Monday's earnings report.

Total megabytes sold in the first quarter increased 120% year over year and 14% sequentially, SanDisk said.

The company projected that sales in the current quarter would range between $750 million and $850 million, well below the $1.09 billion expected by analysts polled by Thomson Reuters.

"While the industry downturn has been more pronounced and severe than expected, we are optimistic about our long-term renewed growth when the market rebounds," Harari said.