Monday, February 14, 2011

Reader responds to Avian's NAND call:

A particularly knowledgeable reader responds to Avian Securities' negative NAND call:

I am the guy who replied to the "Straits of Messina" piece you did last April. In that piece, the analyst suggested that Sandisk would make $2.41 in 2010, while the consensus was at $2.71, and I was between $4 and $5. It turned out to be $4.60.

1. Avian says that they think bit growth will be 101-120% in 2011. Well, Steve Newberry of LRCX just said in their CC that he expects 85-95% bit growth, and they are higher than the vendors' own estimates (MU for example has said 70-80%). I have to believe that Newberry, as an important equipment supplier to every NAND vendor, has a good handle on that.

2. He makes numerous assertions about NAND capacities in tablets--"our checks indicate only 16GB or less of NAND" ex-Apple. Well, aside from the fact that Apple currently dominates tablet sales, that is mildly absurd. These things are going to record 1080 video and have 5-10 megapixel cameras, but only 16GB of storage? They better have card slots for additional storage, if so. The cards, as a reminder, use NAND.

3. Avian says "demand side could be too high" (my ital); yeah, sure. And it could, as has happened since the iPad went on sale, also surpass current estimates. Sure, most of the non-Apple entrants won't make it. But most of the vendors won't just stop making new versions either. They will retool, and come out with new versions--the potential market is just too large and too important to just cede the tablet space.

4. Avian says, "Smart-phone embedded capacity shrinks as Android outpaces iOS." Well, good grief, non-Apple smartphones try to compete by outspecing Apple. "We gotta better deal--twice as much storage"--and that amount will increase as the price of NAND goes down, which it certainly will. Plus Apple is now planning to come out with a cheaper iPhone to address the lower priced market. And so-called "feature phones" becoming extinct as more people want their phones to do--and "remember"--more things. But--

5. The price of NAND hasn't come down. Q1 is seasonally a weak quarter for pricing, but so far, despite projections to the contrary, pricing has remained firm to slightly up, in both spot and contract pricing. Even normally bearish inSpectrum just came out with a cautiously bullish report on it, although they say they doubt its "sustainability." Of course, since inSpectrum has been bearish for a long time and been wrong, maybe they are a contrary indicator.

6. He is right to say that a lot of new supply is coming to market in 2011. Most of it will come in Q3 and Q4, though. And he conspicuously doesn't even mention SSDs. SSD sales have started to simmer--and when the 2x node becomes more common, and pricing really does begin to slide, they will become even more common. It is astonishing to me that there is no mention of it when he is talking about supply.

7. Just as conspicuously, he fails to mention Toshiba/Sandisk. He claims that MU/Intel is "leading the way" in the transition to 2x. It is true that they were the first to announce, and the first to market with it. But their quantities are still relatively small, which is one reason why MU and Intel still have single digit market shares and have not been gaining on the leaders, with Samsung and Toshiba/Sandisk each having high 30 percent shares.

8. Micron doesn't have Intel's help in IMFS; Avian spins this by saying that it "potentially opens the door for a new capital infusion partner in IMFS." Good grief--and who would that partner be? Hynix creditor/owners have been trying to find a buyer for its operations for well over a year now; no one wants to get into this business, however booming it is. The reason is that it is a duopoly, with both of the leaders being extremely strong financially and technologically. It is difficult to make NAND. The DRAM producers who tried to break into the market a few years ago found it impossible to do it profitably. Intel was only mildly profitable in NAND in H2 of last year as per their CC, despite the fact that that was an incredibly strong market (why do you think that they aren't participating in IMFS?), while Sandisk and Toshiba both made strong profits in NAND. Micron will remain a second tier player in NAND, along with Hynix. The duopoly will continue; no one else will be entering this space. The barriers to entry are simply too high, contrary to those who persist in sneering that NAND is "just a commodity." NAND, as Eli Harari said on more than one occasion, is not DRAM. They are very different products, and the two spaces have very different structures. This is very poorly understood, probably because it is certainly true that they have many similarities.

9. Which brings me to the last point--Avian says "Continued expansion in 2012 will add 200k+ WSPM as Samsung begins to flex Line 16’s muscle." Well, that is a favorite line of people who are bearish on NAND (usually that means Sandisk, since they are the only pure play in it). As if Samsung will destroy its competition in NAND like they did in DRAM. They ignore first, that Samsung already tried to do this a few years ago and while they did essentially drive out the Taiwan wannabes, they didn't drive out Toshiba/Sandisk (although they did weaken Sandisk). Second, that Samsung pays royalties to both Toshiba and Sandisk. Third, that technologically, they are inferior technologically to Sandisk and Toshiba in NAND. And fourth, it is already a duopoly; who else are they going to push out? There may have been some justification for their past market share grab in 2006-07, when the Taiwan DRAM players were trying to edge into the market. But that is no longer the case. Micron is no threat; their new fab will have a capacity of about 100 wpm, not enough supply to push them into Tier 1 status.

Avian says that there will be 200k+ wpm in 2012; well, that is likely, but it is also very likely that 2012 will be the Year of SSDs like 2011 is the Year of the Tablet. And, news flash, SSDs will eat up a whole lot more capacity than tablets. Price elasticity will rule--As NAND ASPs come down, more computer vendors will be using SSDs in their machines, and more consumers will opt to buy them. Any NAND supply glut will be temporary for at least the next few years as SSDs become the norm.

Notablecalls: Excellent stuff!

Disclaimer: I have no clue who this reader is. Judging from the quality of the commentary I'd guess he is a) a fellow sell-side analyst b) a buy side analyst c) an industry insider.

3 comments:

Sam said...

I'm not sure if I should say this, but the answer is--"None of the above" on your speculations on my identity. I am a full time professional trader, I work for myself, and do my own research in addition to reading any research of others that I can get my hands on. Which is why I especially appreciate your in depth summaries of what analysts are saying about particular companies.

That said, thank you for allowing me to comment and especially for highlighting the comment. As is perhaps clear from my comments, I have a long term stake in Sandisk that I expect to continue holding for awhile, and I expect it to be quite a bit higher a year from now. I don't get a salary from someone else; if I am wrong in my analysis and trades, I get burned. That gives me added incentive to be right as well as added incentive to respond to analyses that I believe to be misleading or inaccurate.

notablecalls said...

your place or mine?

notablecalls@gmail.com

Sam said...

:)

Perhaps I should have made one point more clear in my previous response: there is no doubt that pricing will go down. It must go down in order to enable the SSD market. But noting falling ASPs and stopping there misses the real question, which is: Will ASPs fall more quickly than the vendors' costs? My contention is that that is unlikely to happen in the foreseeable future. The duopoly is solid. There are considerable barriers to entry in this business (both financial and technological, the latter defended by a deep moat of patents), and the "rulers" of this duopoly, Samsung and the Toshiba/Sandisk partnership, will allow Micron and Hynix to have their share as long as they don't try to dramatically increase it. The "rulers" also know that it would be futile and self-destructive to try to knock out the other one, and besides, their competition over the years has pushed them each to be stronger, with the pace of innovation and transitions keeping out other players.

In short, I think it is a great opportunity to buy a pure NAND play like Sandisk, a company that holds many of the patents that create the moat and whose results will be undiluted by other businesses, unlike Samsung and Toshiba. The stock trades at a meagre PE of 11x trailing earnings, and while the consensus for next year is currently lower than last year (about $4.20 or so), that is, IMHO, only slightly more accurate than the consensus was last April. It is still a little early to be giving a solid call for the coming year, but absent a macro meltdown and slower growth that is completely unexpected in sales of smartphones and tablets, I will be surprised if they don't earn at least $5.50, and more likely north of $6. Plus, as the story gets more accepted and the SSD market really takes off, they should get some PE expansion as well to 14-16. You do the math.

JMHO, though. Like everyone else who has been in this business for any length of time, I've been right before and I've been wrong before. But I have a pretty high level of confidence in this call.