SanDisk Comes Under Fire From All Sides (SNDK)

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SanDisk Corp. (NASDAQ: SNDK) is now under fire from all sides as the stock is sliding to new 52-week and multi-year lows.  The company’s recent losses looked like one of the worst quarterly reports for a former hi-flier that has come out this earnings season.  Now, the company has lost its $26.00 per share bid from Samsung in Korea.  These issues and other issues are likely to bring a firestorm from multiple fronts into SanDisk’s corporate offices.

Management was holding out for a much higher offer, but the rationaleof "the 52-week high" is about as rational as saying you won’t sellyour 4-year old car because you paid a much higher price and you don’twant to lose money.  It is understandable why managers don’t want tosell out in troubled times.  But $26.00 for shareholders is now aboutas far away as Mars.

The company has also run the risk of a mini-disaster in its MP3 playerefforts.  How many Sansa music and video players have you seen thatwere actually being used out in public?  I have seen them in stores buthave yet to see a single person at the gym or out and about with one.  There may be nothing wrong with them, and the pointisn’t to be critical of the device.  The critical tone comes from theeffort and the costs at a time where the leadership was alreadyestablished and no new competitive advantage was within reach.

SanDisk started out as the flash memory stick leader and then decidedthat maybe it should go into the consumer electronics with the launchof its Sansa MP3 player after the wild success was seen in the iPod.When companies go from technology suppliers to retail productsellers, they take on a much larger risk and in some cases can actuallyjeopardize their supply customer relationships if they become directthreats.

The company has also now taken steps to idle growth plans while theeconomy is slowing and is expected to be in a funk through at least thefirst half of 2009.  This is a siganal that operating losses at current levels would be an almost certainty.

This company is not going to crawl into the gutter and die.  In fact,it will likely remain the flash memory leader.  The major problem isthat being a major memory producer has a generational history of beingfull of great times and depressing times.  It seems that DRAM and Flashmemory does not at all experience ups and downs in the economy in thetraditional sense.  Companies in these sectors experience major growthphases or depressions.  We have even argued that owning memory chipcompanies is no different than owning commodity companies, with the keydifference that this form of a commodity almost never rises in price.

At SanDisk, it is becoming evident that management, employees, andshareholders are all in first part of a depression right now.  Ifthings continue to get worse, shareholders are going to start callingfor real blood.  It is amazing that they haven’t started those callsyet.

Since the company lost its buyout offer, the shares are down almost 30%at $10.70 this morning.  This is a new 52-week low as the 52-weektrading range was $13.06 to $45.49.  At the end of 2006 and start of2007, this was north of $50.00.  Shares are now back to 2002 and 2003levels and the business prospects ahead are not looking like any goodnews is coming.

Jon C. Ogg
October 22, 2008