There never seems to be a dull moment in the flash chip industry, and once again I find myself having to comment on the rollercoaster at SanDisk Corporation (Nasdaq:SNDK). On Friday, Citi analyst Craig Ellis struck again when he downgraded his recommendation for SanDisk to "Neutral" from "Buy" and cut his target price to $27 from $35. The last time he downgraded the company was in October 2006.
Ellis's move is understandable, in light of flash prices which appear to be in a state of freefall, and macro economic concerns worldwide, but at its current price, Ellis appears to have locked the stable door with the horses having already bolted, unless he knows something that we don't. Back in March, an analyst from JP Morgan lowered his recommendation and price target to around $20, and the stock duly rebounded to $33. In any event, Ellis's move was well received by the market, as befitting a top flight analyst, given that SanDisk's share slumped 10%. I am informed that company CEO Dr. Eli Harari was in Israel last week for a brief visit and made it clear at the meetings he held with local employees that the company is building itself for the massive demand that is expected from 2010 and onwards.
Last week's announcement by China that it would raise prices of gasoline and diesel is highly significant. China is believed to account for 10% of global crude oil consumption, but in recent years it has accounted for 50% of the record increase in total demand. It will be interesting to follow oil prices in the wake of the Chinese announcement which is seen as slowing consumption there, the front page article in "Barron's" which says this is a bubble that will dissipate by the end of the year, and the moves by the Saudis, who announced on Sunday that they would boost production to 9.7 million barrels a day, their highest level of output since 1981.
Aside from monitoring gadget companies such as Apple Inc. (Nasdaq: AAPL), Research In Motion Ltd. (Nasdaq: RIMM), and their chip suppliers, anyone looking for the light at the end of the tunnel, would do well to follow the progress of the Internet infrastructure king, Cisco Systems Inc. (Nasdaq: CSCO). Back in August 2007, during the results season, it was company CEO John Chambers who said that the banks crisis "would pass within weeks." By November he was already warning that there could be a certain degree of harm to business because "the large banks are reluctant to invest," a statement that duly sent Cisco and all the rest of Nasdaq off on an extended correction. In February, he officially lowered his full-year growth guidance to 10-12% from 15-17%.
Cisco was within sight of its 2008 high at the beginning of this month, reaching almost $28, with investors looking ahead to the end of the year when the company is seen returning to a growth rate in excess of 15%. Last week it experienced a sharp sell-off which sent it down 6.5% to below the $25 level. It is said that there was a lingering fear throughout the NXTcomm 2008 conference in Las Vegas last week that telecommunications providers - the telephone and cable companies - which, until now, were the key engines driving growth at Cisco and its competitors, would follow the enterprise sector and also cut back on investment.
Cisco will be holding an international investor conference in London this Thursday, with the participation of its CFO, and the market will be listening very closely to what he has to say, given that, among other things, two thirds of the July quarter - the final one in the company's fiscal year have already passed. Cisco's investors, incidentally, are anxiously awaiting an announcement from the Republican presidential candidate Senator John McCain on his choice of running mate, since rumor has it that he is set offer the post to his big supporter, Chambers. For his part, Chambers has denied that he will be retiring from Cisco to go into politics, no matter what job he is offered, and has made it clear he has at least sfive more years to go at Cisco before he turns his attentions to his favorite issue - education.
Because of last week's sharp fall and with the investors' day in London due later this week, Goldman Sachs is advising investors to pick up Cisco shares. In their view, the company has already priced a partial slowdown at its suppliers into the results it published in May, with projected growth down to 22% from 37% the year before, so there was little news of substance in the rumors coming out of Las Vegas.
At the same time, Goldman Sachs urges caution when it comes to Cisco's competitor in the routers sector, Juniper Networks (Nasdaq: JNPR), in the run-up to the upcoming results season. Juniper, they feel, has failed to take market share from Cisco and will have difficulty meeting the 20-25% full-year growth guidance it gave at the beginning of the year, since it didn't take into account the partial slowdown at its service providers, which account for 58% of its sales. At its current price of $22, Juniper not so interesting but Goldman Sachs believes that if it rallies to $25 by the time it unveils its results in the final week of July, it will make a good short investment.
Last Thursday's trading proved that the price of oil has been having a marked impact, in the tech stock sector, despite the lack of any direct connection between the two. The sharp fall in prices following the announcement by China that it was raising its prices for gasoline and diesel, sent the Nasdaq up 1.3%, with certain semiconductor stocks such as Marvell Technology Group (Nasdaq: MRVL), and Broadcom Corp. (Nasdaq: BRCM) making exceptional gains of up to 7% even though neither company had nothing specific to report.
I am inclined to think that the oil price has become a sort of "recession option" where tech stocks are concerned, and leading on from this, the shares of gadget chip companies have become more sensitive than any others to oil prices, on the assumption that falling oil prices will hold the recession at bay and vice versa. Tech stocks have been suffering from negative sentiment since November 2007, largely as a result of their status as a "guest star" in the banks and oil crisis, since most of them have not seen any noticeable slowdown in demand. This fact is likely to be highlighted once more by Research In Motion Ltd. when it unveils its results after trading tomorrow evening.
Published by Globes [online], Israel business news - www.globes-online.com - on June 24, 2008
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