At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
The popularity of solid-state memory
In recent months, leading tech manufacturers have unveiled a slew of new tech devices -- and not a one of them has a hard disk drive. Microsoft's (NASDAQ:MSFT) new Surface tablet is the latest, of course. But there's also been the new Kindle Fire HD from Amazon.com (NASDAQ:AMZN), the latest Lumia phone out of Nokia (NYSE:NOK) and any day now, we'll get a gander at Apple's (NASDAQ:AAPL) latest wunder-toy, the iPad Mini
What do all these devices have in common? They're light. Portable. Wireless. And not a one of them is designed to carry an internal hard disk drive. Instead, all these devices rely on "flash" memory in the form of solid-state drives.
You'd think these would be exciting times for the SSD companies that supply the makers of these devices. Problem is, they may be too exciting. As in, heart-attack-inducing exciting.
That's the upshot of a new downgrade out of RBC Capital Markets this morning. Arguing that the plethora of new mobile e-devices is creating accelerating demand for flash memory, RBC made the unusual move of downgrading leading flash memory supplier SanDisk (UNKNOWN:SNDK.DL) on the theory that it may not be able to keep up with demand.
According to RBC, SanDisk is saying it expects flash memory demand to rise 30% to 40% in 2013, and aims to avoid a risk of contributing to industry oversupply by expanding its own production rate at 30%. In RBC's opinion, doing this creates at risk that the company "could be positioned to lose market share," and may even "be forced to buy lower-margin non-captive bits to meet demand" -- shoring up its own too-low-capacity by buying third-party flash memory.
Much ado about nothing
And yet, I'm probably biased in saying this, because I own SanDisk myself (and Nokia, too -- Fool disclosure), but something about RBC's analysis just doesn't ring true. You see, at the same time that RBC worries that flash demand will overwhelm SanDisk's ability to supply it next year, the analyst also worries that flash demand will under-whelm in the last couple months of 2012, and early 2013 as well: "1Q13 could see oversupply situation as softer seasonal demand pressures NAND pricing and margins, particularly in the retail market (41% of sales)."
So on the one hand, RBC is criticizing SanDisk's decision to keep tight control over inventory oversupply. On the other hand, the banker warns that a risk of oversupply is going to hurt profit margins.
Indecisive much, RBC?
In short, RBC's panic seems a bit overdone. As for the rest of us, faced with the choice to follow the analyst's lead and pare back our positions on SanDisk, it's worth pointing out a few things out.
While our records on CAPS indicate that RBC is a fine analyst in many respects, outperforming the vast majority of investors on the market, and getting slightly more stock picks right than wrong, there is one industry sector where RBC consistently underperforms the competition: Semiconductors. Out of nearly three dozen stock recommendations made in the semiconductors and semiconductor equipment industry over the last six years, RBC is currently beating the market by statistically significant margins on just 22.5% of its picks. Getting about three picks wrong for every one it gets right, in other words.
Is that proof positive that RBC is also wrong about SanDisk? No. But is it good reason to take the analyst's latest downgrade with a pinch or two of salt? Definitely.
As mentioned above, Fool contributor Rich Smith owns shares of SanDisk and Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 296 out of more than 180,000 members. (By way of comparison, RBC Capital Markets ranks 5,738).
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