"Our research suggests Apple is in the process of coming to market with 16GB and 32GB iPod Video solutions based on NAND flash," UBS analyst Alex Gauna wrote in the firm's second iPod-related research note of the day. "By our calculations, this eventuality, coupled with the Apple iPhone ramp and modest further inroads by SSDs, should swing the NAND supply/demand equation back towards, but not into equilibrium."
For calculative purposes, Gauna is modeling the Cupertino-based iPod maker to ship 2-3 million iPhones and 3-5 million flash-based video iPods during the second half of the year, which he believes will close NAND oversupply from a 7-9 percent risk to a 2-4 percent risk. The end result, he added, will be some NAND price firming towards the second half of the year followed by some weakness in early 2008 -- a similar patterned experienced in late 2006 to 2007.
The analyst's comments are in line with those of a recent AppleInsider report, which revealed that Apple's sixth-generation video iPods are tracking for release during the third quarter and that the company was anticipating a switch away from hard disk drives (HDD) and towards solid state drives (SSD) based on NAND flash.
As noted in the AppleInsider article, a video iPod employing 32GB of NAND flash would pave the way for slimmer, sleeker players with significant improvements in battery life over current HDD models.
In his note to clients, Gauna noted that his checks suggest OEM exploration of NAND SSDs is proceeding with Apple, Dell and HP all in a position to announce NAND-based sub-notebooks or ultra portables later this year. However, he said it's unlikely those devices will hit price points that can drive broader adoption until 2009 and therefore the immediate effect on the 1.8-inch HDD market will be limited.
"On the NAND front, 4GB and 8GB iPhones, coupled with the potential for 16GB and 32GB NAND-based iPod Video players, have the potential to swing the NAND industry back towards supply/demand equilibrium in 2007," he wrote. "While the implications are negative for 1.8" form factor hard disk drives, we believe new storage demand created by iTunes and similar business models, makes for a healthy HDD market in total and we see only modest potential for NAND SSD penetration into the 2.5" and 3.5" HDD markets."
According to the UBS analyst's calculations, a 32GB version of Apple's video iPod, with the ability to hold some 40 hours of video, would need to command a price point of $399 to reach acceptable margin levels for the consumer electronics maker.
"If we consider that current iPods with the ability to play video retail at $249 and $349 price points, and could move to $199 and $299 levels with normal Apple pricing cuts, we believe it is possible that Apple could keep its flagship iPods in the market at these more moderate price points as it ramps a new video version at higher ones," he explained.
Gauna upgraded shares of SanDisk to a Buy from Neutral with a new price target of $53 per share.