When I last touched on SanDisk (SNDK), the shares were trading higher after hours on fairly impressive fourth quarter results. But I should have listened to the call: the real news from SanDisk was the shockingly grim guidance for the first quarter and beyond.

The key takeaways were these: revenue in the quarter is expected to be down 25%-35% sequentially, with gross margins of 24%-28%, far below the Street’s expectations; and the company sees continued sharp deterioration of NAND Flash memory chip pricing.

(The deterioration of NAND pricing itelf is not news.  Price declkines are assumed in everyone's business model.  At the end of a year which has already seen unit prices fall -44% to -78% (see http://www.viewfromsiliconvalley.com/id285.html), a leading NAND supplier is now characterizing recent NAND delcines as "sharp." --Now that's "news.")

 Here are a few bullet points from the call:

  • NAND supply began building in December, “resulting in steep declines in market pricing in the last few weeks.”
  • The industry has been adding capacity faster than demand growth in the current seasonally slow quarter.  
  •     (Capacitygrew faster than demand for a LOT longer than just recently...) 
  • SanDisk expects a “pronounced seasonal slowdown for MP3 players” in the current quarter.  
  •     (Worse than the "normal" seasonal slowdown, apparently?) 
  • The company “has decided to de-emphasize” the private label USB drive business from the recently acquired Msystems.
  • Q1 will be a period of “steep price declines,”, with the ASP per megabyte falling more than in the fourth quarter, while total megabytes sold will decline.
  • (Prices will decline even more quickly than Q4's "steep declines" AND unit volume will decline.) 
  •  The company sees Q1 revenue of $700 million to $800 million
  • For 2007, SanDisk expects ASP per megabyte to decline at least 50%; but if the current supply-demand imbalance remains, “the price decline for 2007 will be more.”  
  • (We already "know" supply will continue to increase...) 
  • Price declines in recent quarters have been 60%-plus; the company says that rate of decline is not sustainable, since the industry can’t reduce costs that fast.

The Street has reacted to the news by slashing estimates and price targets. There are still some bulls  (after all, Wall Street can't keep collecting those big bonuses if the sheep quit buying) who like the stock for the long haul; the bull case is that the huge price decline is actually an advantage  (yeah, right, & black is really white)  in that it allows more direct competition with disk-based storage. But that only works if they can get prices in line. On the call, Goldman Sachs’ Jim Covello noted that the question is not whether the company can sell everything it can produce - the question is at what price.

A rundown…first the bears…:

  • Krishna Shankar, JMP Securities: Maintain Market Perform; 2007 EPS to $1.42 a share from $2.58. Recommend that investors avoid the stock as the company grapples with a rapidly softening flash memory demand and pricing environment, excess inventories, higher operating expenses and intengration challenges with M-Systems merger.
  • Daniel Gelbtuch, CIBC: Maintain Sector Performer; 2007 EPS to $2.45 from $3. While we believe SNDK’s longer-term prospects are bright, weak NAND pricing and internal transitions cloud the near term story.
  • Joe Osha, Merrill Lynch: Maintain Neutral rating; 2007 EPS to $1.80 from $2.50. The pricing implosion at SanDisk has negative implications for the intermediate term, but enormously positive implications for the longer term…We’re below $1 a gigabit already, and we think price could be down to 50 cents a gigiabit by the end of 2007. At that point the prospect of $200 50GB storage devices becomes quite interesting….The stock will probably over react to intermediate-term problems despite the merits of owning it longer term. On the much lower numbers, valuation is not that compelling, either.
  • Craig Ellis, Citigroup: Maintain Hold rating, price target to $46 from $52; 2007 EPS to $1.40 from $2.55. We remain cautious on SNDK shares,seeing little reason to get more aggressive near-term in what is typically a (still-distant) second-half play.

…And a few hardy bulls:

  • Eric Ross, ThinkEquity: Maintain Accumulate rating and $60 price target; 2007 EPS to $2 from $2.85. Most of the bad news is already price in…shares will see less downward pressure going forward.
  • Gurinder Kalra, Bear Stearns: Maintain Outperform rating, and $62 price target; 2007 EPS to $2.20 from $2.31. Despite weak near-term pricing outlook, we believe SNDK offers compelling value at these levels.

SanDisk today is down $3.19, at $39.64. 

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Since the piece we published, SNDK has actually rallied to $41.66 but is still down from it's 52-week high of $66.20 (i.e., buy-and-hold returned -37% over the lkat year). Clearly, we still have a lot of folks who believe, despite the prospect for continued flash declines, the worst has already ocurred.

Are these folks out buying houses too?

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The above is not intended as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Buy and sell at your own risk (just like we do.)