Pricing Worries Hit SanDisk

Analysts fear a price war is brewing for the memory product maker, sending the stock down

Shares of flash memory maker SanDisk (SNDK) plummeted nearly 20% Friday after the computer memory product maker's third-quarter results fueled investor concerns about a price war and triggered ratings downgrades.

SanDisk's products include NAND flash storage cards and are used to store digital data in devices such as cameras or cell phones. The Milpitas, Calif.-based company said late Oct. 19 that its third-quarter net income was $103 million, or 51 cents per diluted share, compared to $107 million, or 55 cents per diluted share during the same period of 2005.

Investors slammed the stock, which was down 20% to $49.30 per share in afternoon trading on the Nasdaq.

"We think competitive pressures and falling prices, along with acquisition risk, may be contributing to bearish sentiment toward the shares," Standard & Poor's Equity Research analyst Sanjiv Hingorani said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) Hingorani also trimmed his 12-month price target $4 to $53.

Citigroup analyst Craig Ellis cut the stock's rating to hold from buy, noting factors such as the company's pricing. "The NAND flash industry is experiencing dramatic growth, which is inviting competition and heightened pricing intensity," Ellis said in a research note.

SanDisk, the world's largest supplier of flash storage card products, is battling to retain its position as rivals in the tech industry clamor for a piece of the action. "Despite a challenging pricing environment in the third quarter we delivered non-GAAP operating margin of 21%, primarily due to our highly competitive product cost structure from our captive flash business ventures in Japan," said Eli Harari, SanDisk’s chairman and chief executive, in a press release.

SanDisk's chip manufacturing is done under a joint venture with Toshiba (TOSBF). The cost structure of that arrangement is intended to help SanDisk manage high profit margin even on a relatively low volume. Nonetheless, the company's product gross margin for the third quarter amounted to 32% of product revenue, the same as the second quarter of 2006, but under the 37% in the third quarter of 2005.

"We believe margins have peaked," Oppenheimer analyst Vijay Rakesh said in a research note, also noting other factors such as aggressive pricing in the industry. Oppenheimer slashed its opinion on SanDisk to neutral from buy.

SanDisk spent $1.35 billion in recent months for Israeli firm M-Systems, which makes storage devices for computers. Rakesh warned that M-Systems has a lower profit business with margins at 23.5%, which "could add headaches" as SanDisk tries to transition business.

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