Sandisk: Stock Price doesn't reflect Fundamentals

SanDisk reported last night. Their results were fantastic, yet the stock barely traded up. This morning, it is down big. What gives?

SanDisk's report last night was in many ways the best that investors could have hoped for. Pure and simple, the world's largest maker of data-storage memory chips reported third-quarter results that beat estimates as it boosted sales outside the United States and sold more chips to mobile-phone makers.

Gross profit margins rose, and the pricing environment \"improved substantially\" in the period, recovering from a recent slump. Excluding acquisition-related charges, stock compensation and the related tax effect, third-quarter profit was 54 cents per share, beating the average analyst target of 33 cents per share. Revenue rose 38 percent to $1.04 billion, exceeding analysts' estimate of $939 million. CEO Harari said in a statement that revenue growth was fueled by strong retail demand outside North America and by sales to mobile phone customers.

Shares moved higher after hours, ending the after hours session well above 50.

This morning, the stock is getting obliterated. Your talking heads on TV will explain the reasons. They will tell you the following: While the CEO was optimistic and said that the decline in chip prices had stabilized from its earlier sharp fall, he also said that prices would continue to decline and that decline may be just over the 16% decline experienced in the 3rd quarter. The company also faces a government investigation into NAND pricing (which seems absolutely absurd given that these chips have become commoditized by market forces and that Sandisk has simply been unable to affect any pricing pressure whatsoever).

Folks, this isn't news. Here is what is going on. There was heavy call option purchasing around 50 and 55 over the last week as many expected SanDisk to perform as well as they did and to move up dramatically. Even as recently as yesterday, the October 50's that expire today traded at significant premiums. But, each trade has a buyer and a seller. The sellers saw an opportunity to reap heavy premiums by selling these options. The sellers were prepared to drive the stock down in order to pocket these premiums, and that is what they are doing today. What is remarkable is that they are able to do it so easily against such a good report and such positive guidance from the company's CEO.

Sometimes the stock market is exactly like the shell games that people try to con you into in the French Quarter in New Orleans.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • Paul Tredentan

    October 20, 2007

    Everything that you have written may be true, but management has invited this crap upon themselves by announcing the day before earnings expiration, especially given how volatile the stock has always been after earnings.

  • tim clinton

    October 20, 2007

    On options expiration, a stock can be driven hard on very low volumes. They did it with SanDisk today easily.

  • Porter

    October 20, 2007

    "FA is noise. The MMs agree with me. Jus' ask 'em. They're always tHERE to answer yOUR inquIRiEs. They're boyscOUTs. They got da stINKin' TA BADges."---Alphonso Bedoya, MM

  • K-Y anyone

    October 20, 2007

    When some have the power to move a stock the direction they want.Then I have no business in any stock .It is sad that this goes on.

  • been-there-done-that

    October 20, 2007

    I believe one of them was GS. They have the reserves, cash and stocks, to do it. GS shorted their own hedgies in order to come up with profit last qtr.

    These insiders just win in any market. Last August they sticked it to the bears with the help of the FED, and now they just ride on the back of the bears.

  • Chris

    October 20, 2007

    May be it is a "Stock Replacement" thing that managers do. Given that lower support level is at $42 any bad earning report will tank the stock. I think this stock is shorted by managers, they bought Nov. call options to cover them. Now, once the stock bounce back in a week, they will sell those options back and make more $$$$$$$$$$$$$$.

  • Buzzcut

    October 20, 2007

    The writer Rob Minton doesn't know what he's talking about. He's mixing in confused suppositions and conspiracy theories about options to explain why he lost his ass today.

    Why did SNDK go down then?

    There were more sellers than buyers.

    Keep it simple, stupid.

  • Marketaddict

    October 20, 2007

    I followed this stock for years and what happened today is not out of the norm. Stock manipulation on Option expiration is fact of life and we have to live with it. But from my experience it is short lived manipulation.

  • Pluto Rememberances

    October 20, 2007

    Buzzcut,

    It has been thirty years since I have read commentary attributing a price move to "more buyers than sellers." Clearly your cognitive powers have allowed you to discern things others have overlooked.

    Yo also neglected to mention that there was no announced order imbalance for SNDK at the "opening", nor was there a dramatic spike in its volume in the first fifteen minutes of activity. This would in turn, therefore, negate your volume theory since a rather insignificant amount was traded in the first fifteen minutes of trade even though a gap opening was evident, culminating in a nearly six dollar decline by 9:45. This might also lead one to actually believe that: MMs do engage in just a wee bit of manipulation AND furthermore to quesion whether your post displays amateur naivite or stupidity. One might be inclined to lean to the latter rather than the former in view of the aforementioned.

  • K.I.S.S.

    October 21, 2007

    I see very little reason to beat up on Buzz. The bottom line is that he is right. Demand imbalances in the end are the reasons for moves. No one can argue that MM's (often the majority stakeholders in the liquid shares of a stock) have the ability to increase their profits by selling calls against inventory, then flooding the floor with inventory to create the perception of sell pressure. Manipulation? Good trading? Don't matter, end of the day more people were looking to unload shares than buy them, thus the bid and offer moved sequentially down throughout the day. I think that come Nov we're trading mid to hi 50's. or Apple buys us out just under 60.

    -cheese

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