Why SanDisk Corporation Pulled Back This Morning

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of SanDisk Corporation (NASDAQ: SNDK  ) sank 2% this morning after Nomura Securities downgraded the flash-memory chip technologist from "Neutral" to "Reduce."

So what: Along with the downgrade, analyst Sidney Ho lowered his price target to $56 (from $66), representing about 17% worth of downside to yesterday's close. While momentum traders might be attracted to the stock's sharp climb in 2013, Ho believes that strong headwinds in the space will likely put pressure on SanDisk's bottom line in 2014.

Now what: Nomura still sees SanDisk posting EPS of $5.16 in 2013, but lowered its 2014 estimate from $5.80 to $5.60. "Rising industry supply and capital intensity, along with a less competitive cost structure, pose risks to consensus estimates in 2014," noted Nomura. "Meanwhile, demand has been soft in the low-end market, and industry growth hinges heavily on solid state drives. We also think any cost advantage that SanDisk may have is shrinking." When you couple those risks with SanDisk's more-than-50% return over the past year, it's tough to disagree with Nomura's downgrade.

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