Lexar Takes Big Lumps

Shares of memory-chip marketer LexarMedia (Nasdaq: LEXR) took a major beating yesterday after the firm reduced its estimate of the upcoming second quarter's final revenue numbers and said it expected a loss.

The company expects sales of $155 million to $160 million and red ink totaling $17 million to $19 million. That's a pretty big disappointment when last year's quarter saw net income of $7 million on $81.5 million in sales. A margin squeeze because of falling prices -- a situation instigated by larger competitor SanDisk (Nasdaq: SNDK) -- gets the blame, but that was old news. Even accounting for the price war, analysts had been looking for somewhere around $186 million in sales and a penny per share on the bottom line.

SanDisk took some knocks yesterday, too, and though the two often move in tandem, the response shows that investors are having trouble differentiating between the two firms. Unlike Lexar, SanDisk has a potent secondary revenue stream in its licensing of intellectual property (IP), with customers that include Sony (NYSE: SNE), TDK (NYSE: TDK), and Lexar.

Last quarter, SanDisk's licensing revenue more than doubled over the prior-year period to $48 million. Lexar's IP revenues fell that quarter to $3.6 million. In addition, SanDisk's larger market presence and tight relationship with raw memory providers help insulate it from price drops.

But getting back to Lexar, a quick look at the newswire finds a dozen or so law firms jumping on the hay wagon to Heck, hoping to win class action suits against Lexar for securities fraud. Vultures always circle those who stumble in the desert, I guess.

On the positive side, there's a recently announcedEastman Kodak (NYSE: EK) partnership by which Lexar will provide Kodak-branded memory, giving the firm access to the venerable film outfit's huge distribution chain. Of course, none of that will matter if Lexar can't make money on an increase in sales.

The stock may look cheap, but it could always be cheaper. With so much uncertainty, Fools would be wise to wait a couple of weeks and take a look at the situation after the full earnings release.

For more Fool coverage of the digital-film business:

• Check out Tim Beyers' excellent assessment of SanDisk's sleeper assets.
• Ponder what Canon's and Fuji's digital-camera sales may mean for memory.
• See why SanDisk is a stock for the lazy investor.

Fool contributor Seth Jayson likes to side with the leader, and that's why he owns shares of SanDisk, but he has no position in any other company mentioned. View his Fool profile here.