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Tech Sector: NAND Flash Memory Is Changing, So Which Names Should You Play?

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NAND is changing and SSD is the looming catalyst, but there simply aren't that many publicly traded players in this space. Here, why SanDisk stands out.

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So here we have one of the largest manufacturers of NAND memory telling us that it doesn't yet see a coming spike of demand from retail SSDs. We have the leading maker of capital equipment for semiconductors telling us that NAND bit growth will nearly double next year, and lastly we have a small company that plays both in the enterprise and retail level of SSD suggesting that demand for its drives is picking up aggressively. These are mixed messages as to timing, but they leave little doubt that the supply/demand equation for NAND is changing and SSD is the looming catalyst.

As I mentioned at the beginning of this piece, to get me interested in playing in the commodity space the product cycle must be a big one. So how big can the SSD's market be for flash memory? At the risk of dumbing down the argument, consider the following: The largest NAND form factors currently in use in mass retail products are the 32 GB and 64 GB drives found in the Apple (AAPL) iPads, and the larger disk drives built into some of the Apple laptops. Just these items have contributed to a near doubling of flash bit demand over the last year. Imagine how much NAND will have to be supplied if only 10% of new PCs and Microsoft (MSFT) Windows-based laptops are equipped with a 250 GB SSD. Sure, there are a lot of flash manufacturers, but here is the catch: Only a few of these manufacturers can produce the kind of flash memory that works in SSDs. Put the two things together and the ramp in demand for high-reliability flash memory may redefine the concept of "a hockey stick." If the disc drive up-cycle which ended about a year ago was strong enough to justify an extended trade in such commodity players as Seagate Technologies (STX) and Western Digital (WDC), my sense is that the potential of the move driven by SSDs more than justifies getting involved earlier rather than later.

The last question centers around which names to play, and unfortunately here is where it gets tricky; there simply aren't that many publicly traded players in this space. OCZ is a newly public, tiny company with highly speculative appeal; if the SSD story catches fire it may well heat up this stock, but whether the fundamentals of this company ever catch on with the story remains to be seen.

The flash side of Applied Materials' business can generate a healthy chunk of incremental revenues, but the company's business remains way too diversified across different semiconductors to be meaningfully affected by increased demand for equipment to tool new NAND fabs.

STEC, Inc. (STEC) has had a virtual monopoly on the enterprise SSD market since its inception, and even under such favorable circumstances it has been unable to benefit its shareholders.

And so this takes us back to SanDisk. SanDisk has a dominant position in the type of flash needed to build SSDs; the potential demand from SSDs is large enough that it would meaningfully impact its bottom line; if enough industry capacity is diverted to producing SSD quality NAND, it could put a floor under prices for more generic flash memory, benefiting the rest of SanDisk's business; and last but not least, SanDisk's finances and valuation are in enviable shape, with $5 per share in net cash, trading at under 2x sales and less than 5x EV/EBITDA, generating ample free cash flow, and carrying a $10 billion market cap which these days seems to be the sweet spot for acquisitions and LBOs.

Sometimes even a blind squirrel finds an acorn, and in this case SanDisk just may have stumbled on one the size of a coconut.

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Positions in EMC, AMAT, SNDK,
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