Santa Ana-based SimpleTech Inc. has carved out a piece of the memory market, to the liking of Wall Street.
Shares of the company have risen more than 140% in the past three months after SimpleTech beat estimates and landed upgrades from analysts. The company had a market value of $400 million last week.
“There’s a transformation going on in their business model,” said Salomon Kamalodine, analyst with B. Riley & Co. in Los Angeles. “The stars are aligned for these guys.”
SimpleTech, which makes memory boards for computers and memory cards for consumer electronics, has found a niche in flash memory for businesses, a market others have abandoned.
Meanwhile, SimpleTech’s finding ways to cut costs. And there’s growing speculation it could exit its less profitable business selling flash memory products for consumers.
“These guys have gone basically from value-add resellers of memory to becoming a technology innovator,” Kamalodine said.
Memory products have been around for a while and fall into two main groups: dynamic random access memory, which goes into computers and handles more temporary data storage; and flash, the increasingly popular option of consumer gadgets and industrial uses.
SimpleTech has made both types for years. But it’s found growth taking off in the past year as prices have fallen for flash and demand has grown.
Flash is seen by some as more sturdy than disk drives, able to resist vibrations and heat more easily.
Companies are interested in flash to replace disk drives in switches, routers, military applications and for gambling machines.
“There’s more stuff to store and the pricing … is enabling the use of flash where it historically has not been achievable,” said Pat Wilkison, vice president of marketing and business development at SimpleTech.
SimpleTech has tapped into this demand by coming up with chip controllers for flash memory that target business users.
These flash products have the longevity that their consumer-gadget flash memory chips can’t match.
While consumer-based flash products require 10,000 to 30,000 read/write cycles (or basic one-time uses), big companies demand 1 million or more.
SimpleTech’s chips enable 2 million cycles,with aims to get closer to 5 million, said Tim Luke, an analyst with Lehman Brothers Inc., in a research note.
This has put them at an advantage over rivals.
“Any new entrants would have to invest significantly in R & D; to develop this technology, while also circumventing (SimpleTech’s) existing patents,” Luke wrote.
That’s not likely for now with today’s market at a relatively small $300 million annually, he said. The commercial market could grow to $3 billion by 2009.
SimpleTech has much of that to itself with Milpitas-based SanDisk Corp. backing off of the industry in the past couple of years.
This market has emerged as SimpleTech’s most profitable business with margins of close to 35%. Consumer flash has margins closer to 15%.
“The margin on these products is extremely good,” Kamalodine said. “I think they’re getting 40% to 50% on their new contracts.”
Margins like that can rival those of software and even some Internet companies.
Consumer flash makes money, but doesn’t exactly impress investors with its thinner margins. With competitors such as SanDisk, prices for consumer flash are under more pressure.
Consumer Flash Sale?
The talk on Wall Street these days is that SimpleTech might unload the consumer business, though company officials haven’t said as much.
The company has been aiming to improve profits in other ways.
In late August, SimpleTech announced plans to spend $28 million to build a plant in Malaysia in a bid to lower costs.
SimpleTech said the plant will be 200,000 square feet and should be operating by early 2008. Malaysia offered tax incentives and close proximity to memory chip suppliers and customers in Asia, which should cut shipping times, the company said.
SimpleTech also gets lower labor and engineering costs, the company said.
Luke said he likes the move. Though plans call for shifting 15% to 20% of production to Malaysia, eventually the bulk,and perhaps all,of the company’s U.S. manufacturing could go to Malaysia.
SimpleTech faces some risks. The company doesn’t make its own flash chips and is at the whim of the sometimes volatile market for these chips.
Rising costs could crimp profits, Luke said.
The upside: Prices for flash chips could further drop in price, he said.
