Sunday, January 08, 2006

Flash Memory and Investing in Flash Memory Companies

Flash memory is rewritable memory used in digital cameras. However, flash memory uses a lot less energy than conventional hard disks and is small, efficient. If you like iPod Nano, it also uses a flash memory stick to the tune of 4GB. The link here shows some flash memory products. So what is preventing the usage of flash memory sticks in PCs and laptops? Cost is the main constraint for the use of flash in PCs and laptops. However, as myriad uses crop up for flash memory in devices ranging from the cell phone to the PC, the price points are expected to drop and more usage of this technology is likely. Slashdot ( ) recently published an article on Flash memory where the following article from cnet was cited. (,39029089,40059358,00.htm)

If the days for flash memory are bright, what are the companies one could invest in to profit from this trend? Will the trend be a similar one as the hard drive manufacturers? Some companies such as Seagate ( symbol STX ) went private and re-emerged stronger and fitter in the hard disk industry. The early travails of the harddisk manufacturers is profiled in the book Innovators Dilemma.

In this article, we take a quick look at some of the flash memory manufacturers and the trends in this area. Some of the companies in the flash memory area are - Sandisk (SNDK), Micron Technology (MU), Lexar Media Inc ( LEXR ), Infineon, Samsung and Toshiba. Samsung mainly makes deals with OEMs and doesnt deal with retail marketing. We will analyze a couple of companies SNDK in this article.

Currently flash memory is ten to twenty times more expensive than hard disk preventing its widespread use. However, flash memory is 30 times more energy efficient than hard disk drives and its long term future looks good. It doesnt hurt that the price points for flash memory are declining while the capacity is increasing. Sandisk has published data on quarter over quarter decline in prices over the past three years in its website ( While the quarter over quarter increase in memory capacity has averaged 10-40%, the prices have declined at the rate of 2 - 20%. Average card capacity has grown from 94 MB in 2002 to 514 MB today. At this rate, it will take another two/three years for this technology to become mainstream and be used in general purpose laptops and desktops.

Looking at Sandisk's balance sheet, the diving price points are not affecting the revenues. Sandisk is showing tremendous growth year over year. Revenues are growing at the rate of 27% year over year and profits are also going at a slightly faster rate 29% this year compared to last because of investment gain in foundries. Stock dilution is growing at 1.38% which is much smaller than Google. The P/E of this stock is currently at 43 which is higher than the growth rate. Currently there is a lot of buzz around flash memory makers because of the success of iPod and other electronic devices. Inspite of the falling prices, the company has been able to maintain and improve its net margin. The other competitor LEXR although growing revenues quickly is behind Sandisk. In the last quarter LEXR reported a quarterly loss mainly because of high interest expenses. LEXR has income from operations before interest payments of 1.2%. This compares to 26% earnings from operations from SanDisk. Micron Technology is also a player in this market but has very low overall profit margins in the range of 1-2%. Intel is also a player in this market but its year over year gains are flat in the flash memory segment. Of the domestic players, Sandisk with 15% profit margins is the leader of the pack. All the flash memory stocks have gone up because of the buzz around flash memory. At the moment, I like the flash memory products like the USB Flash Drive better than the flash stocks at the moment for long term investment. These stocks are good momentum plays and one can play in and out of them quickly for a quick buck or two.

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