Strength in the NAND flash memory chip market, and from Apple’s (AAPL) iPhone in particular, should help SanDisk (SNDK) beat expectations when it reports Q2 earnings when it reports tomorrow, according to a note today from Stifel Nicolaus analyst Patrick Ho.

Ho doesn’t formally cover SanDisk: he’s more interested in the implications for some of his coverage companies, including Teradyne (TER) and Verigy (VRGY), both of which he rates “Buy.” Those two companies make chip test equipment.

“We believe the company (and the overall NAND flash market) has seen a pickup in handset demand, as well as continued strength in many Apple-based products (including the iPhone 3G S),” writes Ho.

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SanDisk (SNDK) shares are coming under pressure this morning after Needham analyst Y. Edwin Mok cut his rating on the stock to Under Perform from Hold.

Mok writes in a research note that the downgrade reflects “early signs of weakness in the NAND flash memory sector that we believe will lead to lower prices.” He contends checks find that NAND product inventories have increased substantially, and that demand in both the retail and OEM channel has slowed since May. Heading into the second half, he writes, “we are concerned that production ramps”–Mok expects higher output from both Samsung and Toshiba–“will swing the NAND sector into oversupply.”

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Good chip company, bad chip company: While SanDisk (SNDK) shares plummet 14 percent following a much-worse-than-expected Q1 outlook, Atheros Communications (ATHR) is up nearly five percent in after-hours trading at $12.68.

During a conference call with analysts following a better-than-expected fourth-quarter report, wireless chipmaker Atheros this evening forecast Q1 sales to fall 12 to 18 percent, which would be a range of $80.61 million to $86.5 million. The Street has been looking for $85 million. The company expects gross profit margin to come in between 48.5 and 49.5 percent, not far from the 49.2 percent of Q4. Operating expenses will fall one to three percent, quarter to quarter, the company said, to $39.5 million to $49.5 million. The company forecast profit per share of three cents to five cents, which is in line with expectations at the top end.

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Toshiba has suspended NAND flash memory production at two plants for nine days due to weak demand, according to Reuters, which picked up the story from broadcaster NHK. The wire service said the company denied plans to shut down all operations at the two factories in Yokkaichi, in western Japan, and Oita, in southern Japan. The Yokkaichi factory is a joint venture with SanDisk (SNDK).

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SanDisk (SNDK) shares are on the rise on rumors that Toshiba might be planning a bid for the company, according to Dow Jones Newswires. The two companies have a joint venture to manufacture NAND flash memories, and Toshiba has been often rumored to be a logical partner for the flash memory chipmaker.

In October, Samsung withdrew a $26-a-share bid for SanDisk; there was speculation before Samsung pulled its offer that Toshiba might serve as a white knight for SanDisk.

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SanDisk (SNDK) shares have received a boost today from Goldman Sachs chip analyst James Covello, who added the stock to the company’s Buy list with a $13 price target.

He writes that the stock’s valuation “is now too attractive to ignore.” He notes that the stock has fallen out of favor after Samsung pulled its $26-a-share takeover bid, but that “SanDisk retains some of the key IP in the NAND industry, which we believe is worth significantly more than what is priced into the stock today.” He says that if the company successfully renegotiates a license agreement with Samsung, even with a 50 percent reduction in royalty rate, the stock would be worth close to $20, even if you assume zero value for its card business and give them zero credit for balance sheet cash.

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SanDisk (SNDK) shares are sharply lower this morning after Samsung withdrew its offer to acquire the company.

In a letter to SanDisk disclosed late yesterday, Samsung Electronics CEO Yoon Woo Lee said he is “disappointed” that the two companies could not reach an agreement. Here is the key part of the letter:

After nearly six months of efforts to pursue a transaction with no meaningful progress, we are withdrawing our proposal to acquire SanDisk. I am disappointed that we have been unable to reach an agreement on our proposal. I continue to believe that a combination of our two companies would have created a superior global brand, an unparalleled technology platform and the scale and resources to drive convergence in the marketplace.

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In case you happen to think that Toshiba is going to outbid Samsung for SanDisk (SNDK), you ought to take note of the company’s currently grim view of the NAND flash memory market.

In fact, as Bloomberg reports, Toshiba today cut its full-year net income forecast for the March 31, 2009, fiscal year by 46 percent to 70 billion yen, which would be a four-year low. The company also cut its sales projection by 3.8 percent to 7.7 trillion yen, and its operating profit forecast by 48 percent to 105 billion yen.

Toshiba is the world’s second-largest producer of NAND flash memory chips. The company said its semiconductor division will lose 65 billion yen for the year due to weak NAND pricing.

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Samsung Electronics Corp. and SanDisk Corp. (SNDK) can both learn some useful lessons from other recent takeover battles in the technology sector, particularly the failed merger talks between Microsoft Corp. (MSFT) and Yahoo Inc. (YHOO). The first lesson is for South Korean electronics giant Samsung. Hostile, unsolicited deals do not have a great history of success in the high-tech business. In the past, such attempts were viewed as a dicey path to take to win over a company where many of the assets were the employees, who could walk out the door. They were rarely pursued.

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Defying skeptics who had warned that a deal would face significant hurdles, Samsung this afternoon announced that it has offered to buy SanDisk for $26 a share in cash. While Samsung had previously said it might be interested in buying SanDisk, many on the Street were convinced that Samsung was more interested in improving its negotiating position on a renewed license agreement over NAND-related patents than actually buying the company. But today the skeptics on the potential for such a deal–and I count myself among them–have been proven incorrect.

This is clearly not a friendly deal. The Samsung announcement notes it is “reiterating” its proposal to acquire Samsung, and includes a lengthy letter to SanDisk’s management that makes it clear that the two companies had been talking for months, but that SanDisk had wanted a higher price. The hostile nature of the offer makes the potential regulatory obstacles to the deal–the combination would own a majority of the global NAND flash production capacity–all the more daunting.

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While SanDisk (SNDK) shares continue to trade sharply higher after Samsung said it is considering making a bid for the company, some analysts are cautioning that the notion of merging the two companies is far from a sure thing, and would involve substantial complications.

Craig Ellis, an analyst with Citigroup, says he’s skeptical that Samsung would really want to buy the company, and finds the probability of a deal to be “low.” He notes that a deal would put an end to Samsung’s royalty payments to SanDisk for NAND flash, which he sees at $414 million in 2008, $309 million next year and $215 million in 2010; and it would provide Samsung with system memory patents on which SanDisk generates substantial royalties.

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Shares of flash memory chipmaker SanDisk (SNDK) are falling $1.89, almost 11 percent, to $15.75 this afternoon following a note by Citigroup analyst Craig Ellis today that says 2009 earnings estimates are in jeopardy for the company because contract prices for flash are plummeting. The stock had shown some improvement of late, rising 18 percent since the end of July as investors speculated that the worst news is over in this year’s collapse in flash prices.

Apparently, it isn’t. Ellis writes that contract pricing in the current quarter looks on track to fall 22 percent, “worse than our SanDisk royalty model [of] down 10 percent.” As a result, Ellis says product gross margin for the fourth quarter of this year and for all of next year could be 1 to 3 percentage points lower than the Street’s modeling.

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For the memory sector, it is a day to forget.

Last night, SanDisk (SNDK) reported an extremely nasty June quarter earnings report–the Street has responded with a host of downgrades. Meanwhile, this morning, Citigroup chip analyst Glen Yeung cut his ratings on Micron (MU), Qimonda (QI) and Spansion (SPSN) to Hold from Buy. The result is that all of the stocks in the beleaguered sector are getting pummeled. Again.

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SanDisk (SNDK) reported a very ugly second quarter, posting revenue of $816 million and a pro forma loss of 10 cents a share, well short of the Street consensus of $906.8 million and a profit of 13 cents.

The NAND flash memory chip company also said it is delaying the start of the next phase of production ramp at its Fab 4 facility, and now expects to start no sooner than April 2009. The company also is pushing out its decision to invest in Fab 5 until market conditions improve.

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