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.
And speaking of the best...
Monday's looking like a great day to be in tech. While most of the market is bleeding red tickers this morning, shares of Apple (NASDAQ:AAPL) are up a good 1.4 % on positive commentary from Citigroup, which initiated coverage of the iEverything manufacturer with a buy rating and a $675 price target.
"Apple is cheap" stories are, however, a dime a dozen. I've been writing them myself for more than three years now, and the shares just keep going higher. A more interesting story this morning is what analysts at Credit Suisse are saying about SanDisk (UNKNOWN:SNDK.DL) -- interesting both because of the rating, and because so far, SanDisk shares haven't gained quite as much as Apple in response to CS' outperform rating, and so presumably have more room to run.
Why does CS like SanDisk? It's not hard to guess. Over the weekend, market researcher iSupply published a report predicting that NAND flash memory shipments for smartphones will soon overtake flash demands for lower-end feature phones -- and then proceed to run away with the market.
According to iSupply, in 2013 NAND shipments for smartphones will rise to 792 million units, outstripping feature phone demand by roughly 13%. Such a number, if proven correct, would represent a startling 29% rise in demand for NAND flash on smartphones -- eclipsing an 11% fall in demand for NAND in feature phones and promising strong future growth in the memory market, as smartphones rise to "dominance."
iSuppli calls this dynamic "a permanent reversal" of the balance between feature phones and smartphones. At the same time, though, the analyst sees a base level of demand for feature phones continuing to undergird the market, predicting the lower-end phones will require at least 500 million units of memory every year through 2016. (Interestingly, if you crunch iSuppli's numbers, the analyst appears to be calling for no more than 11% annual declines in feature phone memory demand over the next several years as well.)
What's it mean to you?
Now, what does this mean for investors? For one thing, it suggests that consensus analyst estimates of 12.5% long-term earnings growth for SanDisk may be too conservative. If...
- 2013 is the year when the market for flash memory for smartphones becomes larger than the market for flash memory for feature phones, and if...
- the now-bigger market is growing at 29% per year, while...
- the now-smaller market is shrinking at 11% (or less) per year...
...then logically, there's a whole lot of growth going on overall. Probably a lot more than many Wall Street analysts are bargaining for, and certainly more than "12.5%."
But does this mean you should follow Credit Suisse's advice and buy shares of SanDisk? Maybe not.
Cash is king
Don't get me wrong. I like SanDisk a lot. I own it myself. That said, I'm more than a little leery of the trend toward weakening -- and lately, negative -- free cash flow at the firm, that's been evident in recent quarters. At the same time as SanDisk's FCF number has waned, however, we've seen surprising strength at rival Micron Technology (NASDAQ:MU), which has emerged from a pretty miserable 2011 to produce a good $415 million in cash profits over the past 12 months.
Personally, before buying any more shares of SanDisk, I'd take a good hard look at Micron, if you think iSuppli knows what it's talking about when talking about flash memory demand.
Other companies worth a look might include Western Digital (NASDAQ:WDC) and Seagate (NASDAQ:STX), each of which sports strong free cash flow, superior to reported net income, alongside low P/E ratios -- 4.6 for Western-D, 3.6 for Seagate. Beware, however: While both of these last two companies have units devoted to solid-state memory drives, their core businesses remain hard-disk drives. As such, they're not nearly as direct plays on accelerating demand for flash memory as are either SanDisk or Micron. Of the two, I'd probably lean toward Western Digital, which while carrying a slightly higher P/E ratio than does Seagate, boasts a better balance sheet, flush with $1.4 billion in net cash (versus Seagate's $500 million cash deficit).
Fool contributor Rich Smith owns shares of Apple and SanDisk. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 277 out of more than 180,000 members.
The Motley Fool owns shares of Apple and Western Digital. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.