Passing on SanDisk's Profits

Making computer memory continues to be a tough way to make a living, as evidenced by the fourth-quarter numbers from SanDisk (Nasdaq: SNDK  ) .

The company shifted 146% more megabytes of memory than in the year-ago period, generating 4% higher sales. The average memory card SanDisk shipped to Best Buy (NYSE: BBY  ) , Wal-Mart (NYSE: WMT  ) , and other retailers was 63% larger than last year, but sold at a 58% discount per megabyte. That means 32% lower unit prices overall, and that's never good news for the profit margins.

Despite all this negativity, SanDisk managed to turn a solid quarterly profit to the tune of $106 million, or $0.45 per diluted share. That's more than you can say for competitors like Micron (NYSE: MU  ) or Spansion (Nasdaq: SPSN  ) of late. And mighty Intel (Nasdaq: INTC  ) feels so uncomfortable in the memory space that it is spinning out some of its flash chips in a partnership with STMicroelectronics (NYSE: STM  ) called Numonyx.

But SanDisk isn't out of the woods yet. CEO Eli Harari sees "a challenging industry pricing environment" in the upcoming quarter, and Japanese electronics giant Toshiba just revised its memory pricing forecast downward, too. Under these conditions, any profit at all should be a remarkable achievement of process engineering and cost controls.

The stock has taken a pummeling, losing more than 40% over the past year and nearly 60% from a high of $59.75 per share. Unit pricing is a larger concern than a looming North American recession, because SanDisk makes more than half of its sales abroad. But taken together, it's a scary one-two punch that could sink the stock even further in the next year or so.

There will eventually be a time to go bottom-feeding, as the memory market starts to bounce. But worldwide supply is growing faster than demand, amid a market share battle between Toshiba and Samsung, and I think we're far away from a stable pricing environment today. Thanks, but I'll pass.

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