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We have downgraded our recommendation on SanDisk Corp. (SNDK - Analyst Report) to Neutral due to the continued declines in PC sales and the anticipated increase in expenses that are expected to impact the near-term results.

Why the Downgrade?

Despite reporting better-than-expected third-quarter results and forecasting a favorable solid state drive (SSD) revenue growth, favorable product mix and better supply/demand metrics in fiscal 2013, SanDisk expects its expenses to increase in the fourth quarter primarily due to expenditure related to the SMART Storage Systems acquisition, seasonal marketing, and increase in R&D costs. These factors are expected to have an impact on the company’s bottom line.

Though SanDisk did not provide any earnings forecast, it is worth noting that the Zacks Consensus Estimate for the fourth quarter is pegged at $1.47. Incidentally, SanDisk delivered earnings per share of $1.51 in the previous quarter (third-quarter 2013).

Although we believe the SMART Storage Systems acquisition is expected to expand SanDisk’s offering in the Enterprise SSD segment and its 19-nm technology is already gaining traction, we remain concerned due to the competitive pressures in the NAND and SSD space. It is noteworthy that Micron’s (MU - Analyst Report) share in the NAND memory market has increased with the acquisition of the Japanese chip-maker, Elpida.

Apart from Micron, SanDisk is expected to face stiff competition from two new entrants in the SSD market, namely Western Digital Corp. (WDC - Analyst Report) and Seagate Technology plc (STX - Analyst Report). Moreover, continued microeconomic sluggishness, tepid IT spending and dismal PC sales are the headwinds that can mar the company’s results in the near term. Per the data provided by IDC, PC shipments contracted 5.6% on a year-over-year basis to 82.2 million units in the fourth quarter of 2013.

Currently, SanDisk has a Zacks Rank #3 (Hold). Investors can also consider better-ranked stocks such as Western Digital and Broadridge Financial Solutions which boast a Zacks Rank #1 (Strong Buy).

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