SNDK Better Bet than MU as NAND Closes ‘Leadership Gap,’ Says RBC

RBC Capital Markets semiconductor analyst Doug Freedman today informs us that last week was the best week so far this year for pricing of NAND flash memory chips, rising 15% from the prior week on the spot market.

NAND is “closing the leadership gap” with DRAM‘s pricing surge, writes Freedman, which also had a healthy 8% price rise last week, though DRAM pricing is still up 40% so far this quarter over the prior quarter, while NAND is up only 10%.

Freedman notes it is a matter of demand for flash in solid-state drives for both consumer and enterprise devices, but also both NAND and DRAM are being affected by some curtailment of supply: by Samsung Electronics (005930KS), among others:

NAND: In our view, we believe that NAND strength in the week could partially reflect a move by Samsung to move customers towards allocation buying, as the Samsung�s bits are becoming increasingly absorbed by internal mobile ramps, particularly its Galaxy S/Note family (with our Telecom Hardware Analyst Mark Sue expecting 275mil units +30% Y/Y in 2013). We expect industry supply to be far more rational than years past. Our thesis is that cost savings due to depreciation roll-off is only slightly less than cost declines created by capital deployment, creating less incentive for capital intensive node shrinks. DRAM: Pricing momentum continues to be driven by: 1) planned supply cuts; 2) slowing bit production given node migrations; 3) strength in the mobile market with LP mobile DRAM loadings moving higher in new smartphones; and 4) conversion from traditional PC DRAM to higher growth mobile DRAM and specialty DRAM (server and networking), resulting in an extended push-out of production.

Freedman has an Outperform rating on both SanDisk (SNDK) and Micron Technology (MU), and a $65 price target on the former and a $10 target on the latter, but he likes the upside in SanDisk better:

While we like MU longer-term on Elpida leverage, we recommend new money into SNDK, as there is risk that the upwards momentum in pricing could be curtailed by execution risks. Consequently, we see SNDK as possessing more upside from current levels with the next catalyst being visibility into higher handset builds in Q2.