Market Overview

SanDisk Gets Hit on Lower Q1 Guidance; Creates Opportunity in Micron?

After the closing bell on Tuesday, leading flash memory company SanDisk (NASDAQ: SNDK lowered its Q1 revenue guidance. Management cited weaker pricing and demand trends for the revision. During Tuesday's after hours trading session, SNDK shares fell roughly 7%. Those losses have been extended on Wednesday morning, with the stock trading down 9.25% to $45.41.

SanDisk now sees Q1 revenue of $1.2 billion versus its previous guidance range of between $1.30 to $1.35 billion. This compares to current Wall Street consensus estimates of $1.34 billion for first quarter sales. The company also lowered its forecast for gross margins to a range between 39% to 41%. SanDisk is expected to release its fiscal Q1 earnings results on April 19.

In the wake of the slashed sales guidance, analysts at Wedbush reiterated their "neutral" rating on the shares and cut their price target for the stock from $45 to $42. The analysts largely discounted the lower revenue outlook, but expressed concern about falling margins which could prove to be a longer-term headwind on SanDisk's flash memory business.

They wrote "while the lowered Q1 revenue outlook wasn't too surprising, given that Q1 is the seasonally weakest quarter for NAND pricing and demand, SanDisk's noting that its Q1 pro forma GM would be below its prior guidance range of 39% to 42% was." The Wedbush analysts added, "we are concerned that the lowered GM guidance could imply that production cost reductions may no longer be outpacing NAND ASP declines, which could potentially set the stage for a more challenging environment for SanDisk in the 2H:12."

In their report, Wedbush notes that the sour outlook at SanDisk should not be wholly unexpected by the Street. On March 22, Micron Technology (NYSE: MU) said in its fiscal Q2 conference call that trade NAND ASP's were down ~23% in the second quarter. In regards to Micron, which Wedbush has an "outperform" rating on, the analysts wrote that weakness in NAND should be priced into that stock and any pullback related to the SanDisk news is a buying opportunity.

They wrote that the Street had "already heard from Micron about the near-term challenges in NAND, which we believe should already be priced into the stock...any weakness in the stock following SanDisk's negative Q1 pre-announcement creates a buying opportunity." On Wednesday, MU shares have lost 5.63% to $7.55 and the name is clearly reacting negatively to the news from SanDisk.

It would appear as if someone is taking Wedbush's advice to heart, as a number of huge trades have hit the tape in MU April call options on Wednesday. A 90,000 contract block trade took place at the $10 strike and a 50,000 contract trade went off at the $11 strike. These appear to be opening trades which are making a low-probability bet on a spike in MU shares between now and April 20. The call options were last trading at $0.02 and $0.01, respectively.

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