I’m posting this article that I had begun writing at the end of December while I was out of the country. After what the market has done recently, SNDK is a full 20% lower in stock price but I think that some of the comments I made are still relevant so I am posting my article anyway. Supply growth of NAND flash is continuing at a phenomenal pace and now with increasing worries about consumer spending coming to the forefront, SNDK may suffer for a while.
Despite selling off substantially after 3rd quarter earnings, SNDK probably still has another leg down from it’s current $35 price tag. My target is the mid-$20s based on a revenue miss due to price declines and a bleak outlook for margins based on the huge amounts of supply coming online next year.
On their Q3 conference call, the company guided to price declines of around 25% offset by 55% bit growth for the fourth quarter. Generally, they guide conservatively and beat on bit growth. For instance, last year they guided to 55% bit growth and reported 75%. So, what’s the problem? Well, Micron (MU) reported their quarter last night and made some comments about nand flash including these gems: NAND Flash prices are down 40% so far this quarter and NAND bit growth of around 60%.
You don’t have to do much math to see that there’s a pretty good chance that SNDK misses their topline number when they report Q1. Notably, the outlook that they provide may be even bleaker because last quarter they told you that they are at full capacity i.e. implying that their margins were peaking. Further, working in your favor, the sell side is impossibly bullish on the name with the 10 analysts who have a target price on the name averaging out to $57.90; 12 buys, 9 holds, and 1 sell in the group as a whole.
We may get a quick short squeeze when MacWorld rolls around and people get excited about a flash-based laptop but I think that will provide another great opportunity to short more stock.
UPDATE 01/28/08 9:32 EST – SNDK reports after the close today. I do not think the risk/reward is quite as good now that the stock has traded below $25. I am covering my position.
