Wait for the Dust to Clear in the Flash Memory Makers

What a week and year it has been for makers of flash memory. After major price wars and depressed sales and earnings, things are finally beginning to look up for many companies in the sector.

 Flash memory makers saw some heavy buying in recent sessions that may finally signal better times ahead. The two main players, small-cap Lexar Media, Inc. (NASDAQ/LEXR) and large-cap SanDisk Corporation (NASDAQ/SNDK), both saw their share prices surge over the past week.

 SanDisk, the world’s number one maker of flash memory cards, with about a 40% market share, surged to a new 52-week high of $52.88 on Tuesday. SanDisk is up about $9.00, or 20%, since September 29, and a whopping 167% from its 52-week low last October 26.

 Rival Lexar, with about 20% of the world’s flash memory market, is also staging a strong rally, up nearly $2.00, or 32%, since September 29, and up over 200% from its 52-week low. The strong surge in Lexar was driven by the upholding of a $465- million settlement it had previously won from Toshiba Corp. relating to intellectual property. The settlement equates to $5.79 per share in cash and adds to the existing $1.63 per share in cash.

 The funds will come in handy for Lexar and will give the company some financial flexibility. The next cash position after debt will be about $492 million, or $6.13 per share. This implies you are paying about $2.00 a share for the company’s non-cash assets, which is attractive.

 Lexar is also seeking a patent-infringement case against Toshiba, which could yield more cash if won. Clearly, the outlook for Lexar looks much better now than it did a week ago.

 Lexar has been losing a nasty price war against SanDisk, but recent major licensing deals with Sony Corp. and Memorex Products, Inc. offer some hope. Lexar already has a licensing deal with Korean powerhouse Samsung.

 If you have a speculative edge, you may want to bet on Lexar to reenergize and come back strong. If you like going with the market leader and want lower risk, then consider SanDisk. But also keep in mind that, given the recent strong surge, both stocks are extremely overbought, so you may want to wait to buy on a dip in the share price. Chasing stocks after a strong rally is generally a risky proposition. Wait for the dust to clear and for the stocks to settle before diving in.