How bad are things at SanDisk?

Things seem to be going from bad to worse at SanDisk (SNDK).

Last Friday, the stock jumped on news that Samsung might be interested in acquiring the company. Enthusiasm then began to wane when SanDisk's chief executive said the company did not need to be acquired.

Today, SanDisk suffered a downgrade when a Lazard analyst offered the following comment on the potential acquisition:

"...this move is highly unlikely and is aimed at putting pressure on SanDisk in its royalty negotiations."

He also thinks the NAND sector is doing worse than most analysts acknowledge.

Furthermore, word in the Taiwan memory industry indicates that SanDisk is approaching customers for possible sales of NAND flash in wafer or die form. This is unusual in that SanDisk typically sells finished chips and flash modules. The takeaway here is that SanDisk's inventory levels are unusually swollen and the company is trying to move product any way it can. Another way of putting it is that SanDisk's capacity is exceeding current demand.

I used to follow SanDisk closely and considered the NAND flash market to be much stronger than the DRAM market. Now it seems that the state of the NAND industry has spiraled down to the same low margin commodity status that has bedeviled DRAM producers for years. We have seen an influx of new producers over the last few years and a corresponding drop in prices per megabyte. In terms of the effect on SanDisk, not even leadership in intellectual property has been enough to maintain previous levels of profitability. Indeed, Lazard indicates that royalties are likely to be squeezed as well as margins.

SanDisk under $10 a share might be attractive but, for now, there is just too much bad news to consider the company a buy.

Disclosure: none