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Flash Crash! SanDisk Teases Ties With Apple, but That Relationship Is Not a Two-Way Street


SanDisk hints it has a way to break out of the pack and join a market leader.

Did you think all the bad news was priced into SanDisk (SNDK) stock after its recent negative preannouncement of weaker-than-expected first-quarter results? (See SanDisk Blowup Highlights Apple's and Samsung's Smartphone Industry Dominance.)

Well, think again, because the flash-memory giant is taking another savage beating today following the release of its full first-quarter results, and the subsequent conference call.

So what's going on here?

Before we go further, I will for the umpteenth time toss out the most important chart in the world for technology investors:

Source: Strategy Analytics

To make a long story short, smartphone makers Nokia (NOK), Research In Motion (RIMM), Motorola Mobility (MMI), and HTC have all seen their sales collapse, making the smartphone market a two-horse race between Apple (AAPL) and Samsung.

In fact, in the fourth quarter, those two names accounted for a whopping 86% of smartphone industry growth -- a trend Minyanville has been highlighting for months.

So what does this mean for SanDisk?

Well, it's simple. It's getting destroyed because flash-memory prices have collapsed due to weaker-than-expected demand. A significant factor in the slowdown has been the collapse of the broad-based smartphone industry growth we saw back in 2010, leading us to the aforementioned two-horse race we have today.

Now, the single most interesting item in SanDisk's earnings adventure yesterday was its not-so-subtle hint at a growing relationship with Apple.

Here is an excerpt from the earnings call:

Vijay Rakesh - Sterne Agee: But you look at the inventory in the channel between – on the handset side, especially with the market share shift. With your engineering expertise you're trying to restrategize your approach to that market. The one guy that you're not having exposure, obviously the biggest, the number one guy on the handset side and on the smartphone side. How do you see your prospects there given your expertise and your position in the handset market?

Sanjay Mehrotra - President and CEO: As we have said before, we are a supplier to all leading mobile handset suppliers. So we really are a supplier to all leading handset manufacturers. So [there are] opportunities that we have in the works, [which] will be addressing the entire set of mobile OEM handsets.

Vijay Rakesh - Sterne Agee: Do you expect in the second half to be able to supply to the number-one smartphone handset supplier in the market today?

Sanjay Mehrotra - President and CEO: Actually, we expect that to be increasing in the second half, because we are already supplying to all of them today, and we expect our strong product roadmap to increase our share there.

Now, that number-one smartphone handset supplier appears to be Apple, as it edged out Samsung in Q4 smartphone sales, according to numbers from IHS iSuppli, IDC, and our old friend Strategy Analytics.

OK, so SanDisk is hinting that it is set to do more business with Apple in the second half.

Sounds great -- there are worse things in life than a growing relationship with Apple.

However, that's not a guaranteed save for SanDisk because, while it will be sending more units to Apple, weakness at the market-share losers like RIM and Nokia is keeping down flash prices.

On the other hand, the collapse in flash pricing should actually benefit Apple as it reduces input costs for its key iPhone and iPad product lines.


Think long and hard before you assume that increased leverage to Apple's market-smashing iPhone (and iPad) is an automatic save for SanDisk. Though to be clear, I'm not making a short call on SanDisk because, due to its cyclicality, it's the type of stock to buy when things look bleak.

As with Qualcomm (QCOM), which is facing a polar opposite of a business challenge because it doesn't have enough supply, the sidelines look quite cozy with SanDisk. (See Qualcomm Loses Its Sparkle as Supply Constraints Present a Double-Edged Sword.)

Twitter: @MichaelComeau

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