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Memory Bulletin: NAND outperforms the market

Posted: 13 Feb 2006 ?? ?Print Version ?Bookmark and Share

Keywords:NAND? flash memory? profit? Nam Hyung Kim?

With soaring profit margins, fast sales growth and booming stock prices, there's no doubt that NAND-type flash suppliers occupy one of the most lucrative segments of the semiconductor industry today. But has all the hype regarding NAND flash caused the stock prices of suppliers to become overvalued?

While iSuppli Corp. typically does not comment on stocks, this analyst believes that the high market valuations of the suppliers are justified, given NAND's continued strong growthand despite the present seasonal slowdown in sales.

The remarkable profitability yielded by NAND was dramatically illustrated in the fourth quarter, as top suppliers Samsung Electronics Co. Ltd, Toshiba Corp. and Hynix Semiconductor Inc. all reported enviable profits. The NAND businesses of these three companies collectively generated more than $6 billion in operating profits in 2005. Meanwhile, the leading removable flash-memory card maker, SanDisk Corp., posted an operating margin exceeding 25 percent during the fourth quarter.

Worldwide NAND flash sales revenue soared to $3.5 billion in the fourth quarter of 2005, up 18.8 percent from $2.96 billion in the third quarter, according to iSuppli's preliminary estimate. For the whole of 2005, revenue for all NAND-type flash, including parts sold in multichip packages, rose to $10.8 billion, up nearly 63 percent from $6.6 billion in 2004.

Growth in unit shipments for NAND-type flash exceeded that of DRAM in the third quarter. Furthermore, NAND is expected to supplant NOR-type flash as the most widely used embedded memory in mobile phones this year.

Riding this wave of demand, the major NAND suppliers enjoyed a surge in stock valuations in 2005. Stock prices for SanDisk and Hynix have increased by about 170 percent over the last 12 months, generating significant value for investors.

With such huge advances, these companies' stock prices may appear to be overvalued. Concerns about inflated stock valuations have been stoked by news of excess NAND supplies and a slowdown in sales increases in early 2006. NAND revenue growth is expected to slow to 7.3 percent in the first quarter, and is set to decline by 7.2 percent in the second quarter.

However, the first and second quarters typically are the slowest periods of the year for NAND flash salesso the present market deceleration does not signal an end to the period of rapid revenue expansion, iSuppli believes. The NAND market still has tremendous opportunity to expand in 2006 and beyond due to explosive growth in demand for data-storage flash.

Because of continuing industry growth, stable profitability and steady cash flow, iSuppli believes that the value of the suppliers' stocks accurately reflects the growth potential for NAND-type flash memory.

NAND usage already is rising exponentially in MP3 players, most notably in Apple Computer Inc.'s iPod nano. Other applications, including digital still cameras and removable flash-memory cards, also are rapidly expanding their use of NAND.

However, the biggest potential market for removable flash-memory cardscellphonesrecently has begun to adopt NAND as an external storage solution. iSuppli predicts mobile phones will exceed digital still cameras as the major market for removable flash cards for the first time in 2006.

This will spur another wave of growth in the NAND flash market, with worldwide revenue expected to rise to $16.8 billion in 2006, up 56 percent from 2005. By 2009, NAND flash revenue will increase to $26.2 billion, rising at a compound annual growth rate of 32 percent from 2004.

While the NAND average selling price (ASP) is expected to decline by nearly 50 percent this year, fast growth in unit shipments will more than offset the price erosion. Because of this, the present high valuations for Hynix and SanDisk do not appear to be in jeopardy of declining.

Hynix is dealing with the rapid ASP erosion by cutting its production costs through the use of several fully depreciated 200mm fabs. This allowed Hynix in the fourth quarter to achieve a higher operating profit than the market leader, Samsung. Hynix now has established itself as the world's most profitable NAND supplier.

Furthermore, Hynix's NAND sales during the fourth quarter exceeded iSuppli's estimate by 21 percent and SanDisk's revenues are expected to grow even more than Hynix's this year, due to rising sales of removable memory cards to MP3 makers and to cellphone OEMs. The company has a major opportunity to boost its sales and profitability this year.

The key challenge for NAND suppliers this year will be managing pricing, while simultaneously maintaining competitive cost structures.

- Nam Hyung Kim
Director and principal analyst, iSuppli Corp.
EE Times

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