Applied Materials Inc. (Nasdaq: AMAT) is expected to report a good quarter, as well as strong guidance, since according to the latest reports from Taiwan, leading chip makers such as Taiwan Semiconductor (NYSE: TSM) for example, are reporting full production lines, a development that will require them to increase their investment in plant and machinery. Apparently, they recently switched to chip quotas for smaller companies, which are the first to be affected when there’s a queue. This is a well known cyclical occurrence in the semiconductor industry, which Tower Semiconductor (Nasdaq: TSEM; TASE: TSEM) could benefit from, if it would only increase its manufacturing capacity.
M-Systems Flash Disk Pioneers (Nasdaq: FLSH) managed to surprise me last Thursday, and not because of the so-called x4 technology. Earlier reports had more or less predicted its arrival, although they failed to gauge the scope of the technological breakthrough it represents.
For me, the big surprise came when I first heard the presentations by the company’s second line of management below president and CEO Dov Moran, CFO Ronit Maor and VP marketing Noam Kedem who appear at investor conferences. The professionalism was evident not just in depth of the technology, which is now common knowledge and has also been secured by way of more than 200 patents. It could also be seen in the marketing planning, in the company and product line branding, in the product design and in the long term planning of almost everything.
The x4 technology could, in my view, have a dramatic impact on four Israeli companies. In addition to M-Systems, whose gross margins will finally move up a league from their presently very low levels, I think the new technology will also affect Sandisk (Nasdaq: SNDK), Saifun Semiconductors Ltd. (Nasdaq:SFUN), and Tower, which is currently engaged in a spat with Saifun over past agreements.
To all those raising their eyebrows in wonder at the connection with Tower, I say that there is no reason why Tower should not be a major manufacturer, in addition to the others that will follow in its wake, of x4 flash controllers for M-Systems, just as it does for Sandisk, whose flash controllers account for one quarter of Tower’s production. And if Tower is short of money, Dov Moran can always write out a fat check to guarantee orders, just as he did with the Korean manufacturer Hynix Semiconductor (KSE: 000660.KS). Migdal Ha’emek is a lot closer to Kfar Saba than Tokyo or Seoul and in addition to being Zionistic, it would also be a very logical choice, as far as distribution of supply is concerned.
As for Saifun, I don’t buy the analysts’ reassurances nor Moran’s warm words about the company. I now understand why Dr. Boaz Eitan left the M-Systems board several years ago, and also, why Moran rushed to unload Saifun stock (Maor gave us a tall story about balance sheets), and why he cancelled the agreement with Samsung, which would have given the latter unrestricted and virtually cost-free access to M-Systems’ patent portfolio.
Eitan left the board due to a clear conflict of interest when both companies were moving forward to x4 technology. It makes no difference if one made the breakthrough in the algorithms and the other in the hardware. The result was the same and this is what’s important to the potential end customer. Neither Moran nor Eitan nor Sandisk president Dr. Eli Harari will decide who is the winner here, but rather, Steve Jobs of Apple Computer Inc. (Nasdaq: AAPL), since he is presently the largest customer for NAND technology in 2007.
If Jobs is convinced that M-Systems’ technology will enable him to bring down the price of the next I-Pod model by as early as the beginning of 2007, while increasing storage capacity for users, he will opt for the x4 over Sandisk and Samsung’s existing MLC technology, as well as the future, basic NROM system from Saifun. Should this be the case, he will force his largest supplier, Samsung, to sign an agreement that will prove to be the most economical for him.
x4 will have another important advantage if it proves to be easier and faster to implement. In this case, Saifun will have to invest a lot more time and effort with NAND manufacturers, and I therefore think it could suffer, especially in the short-term. Notwithstanding this I am keeping it in my portfolio for now as I am waiting for further proof that the M-Systems solution is indeed capable of being applied, and quickly.
Incidentally, Harari gave an interview with Barrons yesterday, in which he explained how he easily raised $1 billion in convertible notes last Thursday for both his own company and Toshiba, to finance the cost of manufacturing NAND MLC chips (that have a double capacity). He spoke of a massive market that will last for many years but made no mention of x4. I will not be automatically buying anything he says about x4 when he finally has something to say, since for years he fooled me and other investors when he dismissed M-Systems’ exclusivity on its patent for the Disk-on-Key technology, and then went to sign an agreement with M-Systems and even form a joint company.
Published by Globes [online], Israel business news - www.globes.co.il - on May 16, 2006
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