SanDisk Stock Up on Samsung Deal

Samsung and SanDisk (SNDK - Analyst Report) have renewed a long-standing agreement on the supply of NAND flash memory (flash memory retains data after the device is turned off, NAND and NOR are the two types of flash memory).

This removes an uncertainty that Sandisk would not be able to supply its customers with flash memory if the agreement was not renewed. An aborted attempt by Samsung to buy Sandisk had been taken as a sign that Samsung may not renew the contract.

Samsung and Sandisk need each other. Samsung has the capacity (Sandisk also has supply agreements with Toshiba) and Sandisk has marketing channels that Samsung does not reach. Sandisk also has a patent portfolio that generates a stream of earnings and Samsung uses those patents.

In 2008, the NAND flash market was in an oversupply position. The three major suppliers (Samsung, Toshiba and Sandisk have over 80% of the NAND capacity) cut back production and deferred expansion plans. As a result supply tightened and prices increased.

However, this is a temporary solution. NAND flash capacity still exceeds demand, it is only the artificial constraints that are keeping supply and demand in balance.

NAND flash obeys Moore's Law. There are two parts to the law; the second part is usually ignored: 1) Performance doubles over a certain time frame and 2) at no increase in cost. As shown below, prices follow a typical decline over time. We have seen price increases before and there will be price declines in the future.

In our opinion, the price of the stock reflects the lessened uncertainty of NAND supply from Samsung and not an improvement in the fundamental supply/demand relationship for NAND flash memory

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