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Wednesday, November 14, 2007

SIA Forecast strengthens case for SanDisk

As we head into the close today, SanDisk (SNDK) is trading well under $40 per share. It is in the vicinity of the lowest prices it has seen in the past two years. It was last at this level in July 2006 and then again in March 2007. It now has a forward PE of about 15 and a PEG ratio of 1.03. These indicators suggest that SanDisk is reasonably priced.

Recap: why the shares have been beaten down --

Earlier this week, market research firm iSuppli downgraded its rating on near-term conditions for suppliers of NAND and DRAM memory chips to "negative" based on expectations that the average selling price for 512 Mbit NAND will drop 24% in the fourth quarter, to 46 cents from 60 cents, after having seen price increases in the previous two quarters.

Last month, Needham and Oppenheimer both downgraded the stock when shares were up around $48. Their message was that supply from competitors looked to increase and pricing could weaken. There were also questions on how solid demand appeared to be going forward. Yet the downgrades came only two weeks after a report by EETimes magazine saying Toshiba's NAND supplies were sold out through December. Toshiba and SanDisk are joint-venture partners in a semiconductor fab in Japan.

Is there a catalyst that would prompt a buy signal?

Today, the Semiconductor Industry Association released their prediction of global semiconductor sales growth for this year and next year. By far and away, Flash memory sales growth is projected to be higher than any other category of semiconductor. Looking at the CAGR for 2010, Flash comes in at 20% while at the other end of the spectrum, DRAM comes in at 1.5%. The remaining categories are distributed in a range between 5.5% and 9.1%.

Also mentioned in the SIA report, is the fact that growth has been driven by strong world-wide demand in consumer devices. This is a market segment where Flash is an important component and where we are seeing high rates of NAND bit growth.

With SanDisk still the preeminent player in NAND Flash memory, the SIA prediction could help put a floor under the share price. It is my opinion that buying SanDisk at the current level presents good opportunity with modest risk. In the last two years, the two times SanDisk traded down to the upper $30's, a strong rally followed. With tech stocks currently under pressure, SanDisk could even get a bit cheaper for those interested in taking a position.

Sources: SIA Forecast: Global Chip Sales Will Surpass $321 Billion in 2010

Disclosure: author is long SNDK as of late Tuesday

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