On Memory Makers, Bargains, and Risk versus Reward
I wrote an article for Seeking Alpha at the end of July forecasting concerns about Spansion's ability to survive given their weak balance sheet. I recently received an e-mail from someone who remembered the article who wanted to know my opinion on buying into Spansion (SPSN) now that the stock is trading at a mere 24 cents per share. Here were my thoughts:
According to SPSN's last 10-Q filing, their book value is around $8.90. One could speculate that a major player in the industry could come along and gobble them up at a discount. Given the current environment and the recent history of the memory industry, I would be surprised if anyone were willing to pay more than $4 per share, but even $2 per share would be much higher than the current selling price and a buyer right now could be make a sizable gain. So one might be willing to take a gamble that this occurs and that a huge return can be made via this route.
However, I would suggest that such a strategy would be very high-risk and that it would be somewhat of a blind strategy (in the sense that it is a gamble based purely on a possibility). I wouldn't necessarily advice anyone against it (if they wanted to go that route), but personally, it's not something I would do. I am admittedly a high-risk investor, but I try to keep away from pure speculative gambles. I'd also suggest that given the way the market has been battered over the past few months, that there are very good deals out there right now that don't require blind risk-taking.
If one wanted to buy into the memory sector, I think Micron (MU) and SanDisk (SNDK) are better bets. Micron is another high-risk stock, but it's one that could rebound with a venegance at some point. Book value for MU is $8.11 per share, and they are burning through cash right now, but their balance sheet is reasonable enough so that I could see them making it through to the end of the tunnel. Plus, one of the major players in the DRAM market, Qimonda AG (QI), is in huge trouble and will likely either be bought out by Micron or head into bankruptcy. Either way, this will help ease oversupply problems in the market and give the surviving companies more pricing power. In 2-5 years, if we can make it out of this current recession, it's possible that MU could suddenly spring back into the black and see very significant gains. While this may or may not come to fruition, I feel like it's less of a blind risk than Spansion (SPSN) right now.
While I am less familiar with SanDisk (SNDK) than I am Micron, the case for them is that their book value is significantly higher than the stock price ($22 book value compared to a $7 stock price) and they have a fairly strong balance sheet. This does not ensure success by any means, but I think the market may be overreacting to bad news for SNDK. They were recently offered $26 per share in a takeover bid, but rejected the offer --- which at least suggests to me that (a) that someone believes there is a lot of value in their assets and (b) management might believe the company is worth even more than that.
With MU, I think the potential is there for gains in the 100% - 500% range and with SNDK, I could see an upside in the 300% range. While you could potentially make an even huger gain buying into SPSN if they did indeed get bought out, I wouldn't necessarily bet the bank on that and think MU and SNDK offer only-slightly-less-appealing returns with a whole lot less risk.