Sandisk: Stock Price doesn't reflect Fundamentals

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.