In the past year, many investors have made -- or lost -- a lot of money on SanDisk (NASDAQ:SNDK). Buyers who jumped on the bandwagon in early 2006 took a quick ride from the high $70s back down to the low $50s. But there were solid reasons for SanDisk's move up from the mid-$20s perch it occupied a year ago, and there are still convincing reasons to keep this flashy stock on your radar.

Flash 101
To understand SanDisk, you must first understand flash memory. SanDisk hasn't just earned its keep in this market; it's played a vital role in innovation. Unlike the RAM chips found in most home computers, flash memory holds information even when its power source is switched off. It comes in two flavors: NOR memory is good when you're not constantly rewriting the information on it, while NAND is cheaper, more durable, and can be erased and reprogrammed faster.

In other words, NOR is well-suited for all the nerdy stuff that goes on inside your cable box or computer. NAND, on the other hand, is the rock star of flash memory, featured in USB memory sticks, digital cameras, cell phones, and MP3 players. SanDisk, sexy company that it is, focuses on NAND flash products.

SanDisk has been a key innovator in flash memory, and it has an extensive patent portfolio to prove it. The company's research focus really pays off; in addition to patent licensing, which brought in $86 million in the first quarter of 2006, SanDisk's innovation lead and patent protection helps to insulate it against competition.

Making widgets?
The market has been unforgiving for companies making other types of memory, such as hard disk drives and DRAM. Once the initial research was done and the value of the given type of memory had been shown, these industries shifted from technical innovation and discovery to simply making widgets. And widgets, of course, are made best when they're churned out by the biggest, most efficient, cheapest manufacturer.

Competitors aplenty are already chasing the large and growing flash memory market. SanDisk's rivals include M-Systems (NASDAQ:FLSH); Saifun (NASDAQ:SFUN); Spansion (NASDAQ:SPSN), a recent spinoff from Advanced Micro Devices (NYSE:AMD); and Micron (NYSE:MU), which has teamed up with Intel (NASDAQ:INTC), but also purchased Lexar (NASDAQ:LEXR), a scrappy but as-yet-unprofitable contender in the flash arena. Micron's main business is DRAM, the epitome of memory-turned-commodity; the company is buying Lexar to expand its presence in NAND flash. What does that tell you about flash memory's future?

Commoditization is not a new concern for flash memory makers. Industry analysts have been rattling this saber for years now, but the margin pressures that accompany commoditization have yet to materialize. That's not to say it won't happen, though. SanDisk's intellectual property gives it some protection, but it may not be enough if flash memory becomes fully commoditized.

Whoa-oa-oa, listen to the music
To stay one step ahead, SanDisk's management has been savvy enough to extend its products beyond memory itself. This move upstream gives SanDisk a little extra insulation against the possibility of commodity memory -- and fattens margins in the meantime.

Quick question: Who's the No. 2 producer of MP3 players? Creative? iRiver? Maybe Sony? Actually, it's SanDisk. The company entered the MP3 market with its flash-based player in November 2004, two months before Apple (NASDAQ:AAPL) unveiled its flash-based iPod Shuffle. SanDisk has no delusions of grandeur; its stated goal is to hold onto the No. 2 spot in the MP3 market. This is great, because it allows the company to capture the extra margin in the MP3 players that it would otherwise lose if it simply sold the flash memory for use in someone else's music machines.

SanDisk has also started to market what it calls the U3 platform, which the company says allows software developers to turn a mass storage device into a "platform for on-the-go computing." Instead of having all of your personal programs, files, and preferences bound to the hard drive your desktop or laptop, the U3 platform lets you store them on a pocket-sized USB memory stick. Plugging in that mini-drive lets you access all your files from any computer.

While they may seem like distractions from SanDisk's core business, offerings like the MP3 players and U3 platform are actually logical product extensions. They should give SanDisk more of the diversification that companies like Micron seem to lack.

Bide your Foolish time
Despite all the positives of SanDisk's business, I'm still hesitant to jump into the stock. SanDisk is off about 30% from its high in January, but the stock is trading at 26 times its trailing-12-month EPS, and 23 times analyst earnings estimates for 2006.

An expectation of steady gross and operating margins may give SanDisk some upside to analysts' expectations of $2.31 in 2006 EPS. By the same token, the stock probably has some room to climb from its current spot in the low $50s. But right now, that upside is fairly small. I don't see SanDisk's business wildly outperforming in the future, creating huge returns for investors. On the other hand, it's highly possible that Mr. Market will panic over the stock, dragging its price down into value territory. If you think I'm talking crazy, remember that this time last year, SanDisk was trading in the mid-$20s!

In my quest to find good growth at compelling value, I'm holding off on SanDisk for now. But I'm definitely waiting for the next time the Nasdaq Superstore puts its stock on sale. There are plenty of stocks out there. Instead of swinging at every opportunity that flashes past, you can sit back and wait for the right fat pitch to knock out of the park.

Further Foolishness in a flash:

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Fool contributor Matt Koppenheffer saves his overpaying for his consumer electronics addiction. He does not own shares in any of the companies mentioned in this article.