NAND flash memory had an amazing 2005, largely thanks to Apple's (NASDAQ:AAPL) NAND-equipped iPod nano. Total sales for this type of memory, which also stores images in digital cameras and files in USB flash drives, grew 64% in 2005, reaching $10.9 billion. After such lofty growth, are we now headed for a downturn?

In response to strong demand, NAND flash manufacturers did what you'd expect: They increased, and are still increasing, their capacity to produce flash memory. All of the big NAND flash manufacturers, including Samsung, HynixSemiconductor, Toshiba, and SanDisk (NASDAQ:SNDK), have added manufacturing capacity. Micron (NYSE:MU) and Intel (NASDAQ:INTC) are jumping in as well. Their IMFT joint venture should start producing meaningful quantities of NAND flash memory during the second half of this year. With everyone jumping aboard the NAND-wagon, production is expected to skyrocket by 200% this year.

Does the world need this much NAND flash memory? Barron's recently published an article suggesting that SanDisk stock could fall 50% this year, because of slackening demand for Apple's iPods and digital cameras. Barron's pointed out that Apple sold only 8 million iPods during the first quarter, compared with 14 million the quarter before -- but come on! Should we really be surprised that a lot more iPods were sold during the quarter that includes Christmas?

It's also easy to be skeptical if you've read one of the many reports from the first part of this year, noting that NAND flash prices plummeted by more than 50%. A closer inspection shows that while the spot market price has dropped by at least 50%, overall pricing fell by only 22.5% during the first quarter, according to market researcher iSuppli. This statistic is supported by SanDisk, which saw its prices drop 24% sequentially in the first quarter. Sure, a 24% quarterly price decline is at the high end of normal. But SanDisk had price declines greater than 20% during four of the last 15 quarters -- one quarter per year, basically. It's also worth noting that the company's gross margins of 44% during the first quarter were just fine.

Despite the price declines, inventories seem to be piling up. Finished-goods inventory at SanDisk at the beginning of April totaled $220 million, compared with just $118 million a year ago -- easily outpacing sales growth. Since prices have declined, the number of megabytes of memory in inventory has also grown much more than the total dollar amount of inventory.

I don't know what will happen to the flash memory market during the rest of the year, but it wouldn't surprise me if the market takes some time to absorb the new capacity. There are some potential new applications associated with Microsoft's (NASDAQ:MSFT) upcoming Vista operating system that could drive expanding demand for NAND flash memory, but I don't know whether they will help much in 2006. Over the long term, though, I think demand for flash memory will likely continue to grow strongly. You can bet that I'll be watching SanDisk. If it drops by 50% this year, I'll most likely be a buyer.

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Fool contributor Dan Bloom owns shares of Micron and Intel. He also owns an Apple iPod, but not one that has a lot of NAND flash memory. The Fool has a disclosure policy.