How do you make a small fortune in the flash memory market? Start with a large fortune!
Flash maker SanDisk (Nasdaq: SNDK) is living proof of that immortal maxim, and Monday night's earnings report didn't show any signs of a turnaround. That's rotten news for SanDisk, but also for direct rivals like Micron Technology (NYSE: MU), Spansion (Nasdaq: SPSN), and Qimonda AG (NYSE: QI).
SanDisk lost $155 million, or $0.69 per share, in the third quarter on net sales of $821 million. CEO Eli Harari explained the disappointing performance thusly: industrywide excess inventories drove down selling prices again, with the net loss including a $109 million writedown of the remaining inventory.
These guys are selling more memory than ever, using innovative manufacturing techniques to squeeze out more megabits per silicon wafer at ever-lower manufacturing costs. But Micron, Samsung (OTC BB: SSNLF.PK), and others are doing the same and it seems like nobody can sell their chips for a profit anymore. SanDisk sold significantly more memory this quarter than a year earlier, but at 63% lower prices. The gross margin was negative. It's tough to make a net profit if it costs more to make those chips than your customers are willing to pay for it, and the situation is only getting worse.
To fight this problem, SanDisk has restructured its joint ventures with Toshiba (OTC BB: TOSBF.PK), giving the Japanese giant a larger stake in two production facilities in exchange for a roughly $1 billion deal. Harari hopes that "industrywide moves to curtail flash capacity expansions are sowing the seeds for the next recovery," and at some point, he'll have to be right. But by then, the industry he's talking about will look very different.
Samsung wants to buy SanDisk, Micron wants to marry Qimonda, and everybody seems to be dating everyone else's girlfriends. The memory business is rapidly boiling down to a mere handful of well-muscled big boys, and SanDisk seems less likely to eat its rivals than to be eaten itself.
If you shorted Micron a year ago, you're sitting on a 55% profit today. SanDisk has lost 66% of its value, blowing away even the S&P 500's 36% swoon. Maybe the secret to memory riches lies in shorting these stocks. But be careful -- when the bounce comes, it'll be drastic. We just don't know who's going to survive that long.
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