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Analyst Blog

On Aug 14, 2014, we issued an updated research report on SanDisk Corp. post its better-than-expected second-quarter results. SanDisk’s year-over-year revenue growth was primarily attributed to strong demand in both client and enterprise SSDs. Notably, SSD sales jumped 97% on a year-over-basis and contributed 29% to total revenue.

SanDisk is making considerable efforts to promote its client and enterprise solid state drive (SSD) products. This is an area with better growth prospects and a more stable pricing environment. Enterprise class SSDs are faster and more energy efficient than traditional hard drives, which is the main factor driving the demand. These drives occupy less space making them more suitable for mobile computing devices. SSDs are also being used in servers to reduce latency, which in turn leads to faster response to real-time applications.

Given these advantages, SanDisk expects enterprise SSD total addressable market (TAM) revenues to reach $8.0 billion in 2017, while the TAM for the enterprise SSD, Client SSD, embedded and removable SSD combined is expected to be $41.0 billion. Moreover, the company expects to generate approximately 40% of its revenues from SSD in 2017, up from 19% in 2013. Enterprise SSD revenues are estimated to increase at a 3-year compound annual growth rate (CAGR) (’13–’16) of 55%.

To achieve these milestones, the company has also resorted to acquisitions. Recently, the company acquired Fusion-io, a flash-based PCIe hardware and software solutions provider, for $1.1 billion in cash. Leveraging Fusion-io’s hardware and software solutions, SanDisk will be able to enhance its existing flash memory storage portfolio. Some of SanDisk’s other acquisitions include SMART Storage Systems and Pliant Technology in the SSD segment. Furthermore, the acquisitions of FlashSoft and Schooner Information Technology not only provided the company a solid traction in the client SSD market, but also enhanced its SSD-software competence.

SanDisk is set to benefit from the improving demand trend in NAND technology in the coming quarters. Restricted NAND bit supply and surging demand from growing usage in consumer electronics and mobile gadgets bode well for a stable supply/demand balance, leading to a benign pricing environment. According to SanDisk, bit supply growth is expected to grow 30–40% in 2014 and remain within this range through 2018. In 2013, bit supply growth was 38%.

Also, SanDisk is prudent in regularly returning value to shareholders. The company repurchased stock worth $371.5 million and paid dividends amounting to $102.4 million during the first six months of fiscal 2014. Going forward, the company is expected to return 100% of free cash flow to shareholders through dividends and share repurchases subject to the need for strategic mergers and acquisitions and investments to avail other growth opportunities. Share buybacks will boost earnings per share and increase shareholders’ loyalty.

Nonetheless, lackluster PC sales, competition from Micron Technology Inc. and Western Digital , and currency fluctuations remain the headwinds. However, we remain positive on management’s commentary of a turnaround in the coming quarters and strong secular demand for its storage products.

It is also worth mentioning that Apple Inc. remains a major customer of SanDisk. Hence, we believe that with price and cost benefits as well as long-term NAND supply agreements with Apple will help SanDisk to outperform the NAND market.

Currently, SanDisk has a Zacks Rank #3 (Hold).

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