By
Anders Bylund
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February 3, 2009
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The computer memory business is brutal. How brutal, you ask? So brutal that SanDisk (Nasdaq: SNDK ) can't turn a gross profit anymore. This makes SanDisk a value trap of colossal proportions until further notice.
The production of memory chips, flash cards, and MP3 players cost SanDisk $1.2 billion in the fourth quarter. Total sales stopped at just $864 million. SanDisk ended up in the red before even looking at the cost of operations such as administrative and R&D costs. And then there's another cool billion of goodwill impairment charges and other sweet nothings. It adds up to a GAAP net loss of $8.25 per share, or $1.65 of red pro forma ink. Some of the pain is not repeatable -- SanDisk has zero goodwill left to write off.
The culprit is obvious: Another quarter of horrific oversupply and lacking demand for memory chips gave consumers the cheapest memory they've ever seen but didn't do the chip industry any favors. For further proof, look back at Micron's (NYSE: MU ) latest disast- ... er, quarter. Intel (Nasdaq: INTC ) and AMD (NYSE: AMD ) are working hard to distance themselves from the memory market, handing those operations over to spinouts Numonyx and Spansion (Nasdaq: SPSN ) , respectively. And I don't blame them one little bit.
With a book value of $13.99 per share, SanDisk may look cheap at less than $9 per share. Don't fall into that value trap, Fool. This industry needs to consolidate a good deal before we can expect any kind of real turnaround in those free-falling product prices.
Whether it'd be Samsung snapping up SanDisk to take advantage of its recognizable MP3 player brand or Toshiba perhaps doing something similar to Micron, somebody needs to pick up the pieces of this broken industry. Maybe Apple (Nasdaq: AAPL ) could use a captive supply for the flash chips that go into its iPods and iPhones? That would only count as consolidation if the "House of Jobs" bought more than one memory maker.
Then, the giants left standing can rein in production until the supply-and-demand equation starts to work out. Then, and only then, would I buy a Micron or a SanDisk -- assuming that they still exist as independent businesses.
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