SanDisk’s (NASDAQ:SNDK) stock has fallen by 35% since the start of the year on the back of revisions made by the company to its previously stated revenue guidance and the anticipated weakness in its fastest growing division – solid state drives (SSDs). SanDisk’s stock plummeted by over 18% on Thursday, March 26 after the company announced that its Q1 revenues could be around $1.30 billion, lower than the previous guidance of about $1.40 billion. This would imply a 15% decline in revenues compared to the prior year quarter. Moreover, this was the second consecutive quarter when the company revised its expected revenues, the prior occasion being January this year. At the time, SanDisk reported weaker than expected sales for Q4’14 and revised expected revenues to $1.73 billion from $1.85 billion previously.  The company has yet to announce its expected revenues for the full year and has postponed its analyst day presentation from May to a later unconfirmed date. 
We have a revised $86 price estimate for SanDisk’s stock, which is significantly higher than the current market price. Below we take a look at our revised forecasts for SanDisk and our long-term expectations for the company.
- SanDisk Beats Consensus On Revenue, EPS As Removable Storage Sales Rebound
- SanDisk Earnings Preview: SSD Sales To Continue To Drive Results
- How Has SanDisk’s SSD Division Performed Over The Last Few Years?
- What Is SanDisk’s Fundamental Value Based On Expected 2016 Results?
- What Will SanDisk’s Revenue And EBITDA Look Like In 5 Years?
- SSD, Embedded & Removable Storage: What’s SanDisk’s Revenue & Earnings Breakdown?
Solid State Drives Segment Hits A Bump
SanDisk’s SSD division has witnessed tremendous growth over the past few years, with revenues growing from around $150 million in 2011 to almost $2 billion in 2014. As a result, the contribution of SSDs to SanDisk’s net revenues jumped from 2.6% in 2011 to almost 29% in 2014. Within the SSD division, enterprise SSD sales grew by a massive 140% y-o-y to $660 million for the full year, while client SSD sales were up by 36% y-o-y to $1.25 billion in 2014.
Anticipating weakness in SSD revenues in 2015, SanDisk’s management mentioned that it expects the contribution of SSD revenues to stay at previous year levels in 2015. The company’s guided range of revenues stood at about $6.7 billion, of which SSD revenues were expected to contribute roughly $1.9 billion – about flat over the previous year. We currently forecast SanDisk’s full year enterprise SSD revenues to be about $920 million, compared to the $1 billion guidance given by the company previously. Our estimates are still slightly optimistic mainly because SanDisk’s $1.1 billion acquisition of Fusion-io is expected to be accretive to its earnings from mid-2015. Irrespective of the market sentiment at the moment, SanDisk has the “broadest portfolio of enterprise and consumer flash solutions” in the storage industry. 
On the other hand, SanDisk could have a tough year for client SSD sales, mainly due to losing out on a major customer in January. It is widely believed that the major customer is Apple (NASDAQ:AAPL), which has switched to Samsung (PINK:SSNLF) for sourcing SSDs.   SanDisk will provide more details on the matter in its Q1’15 earnings call transcript.  We expect client SSD revenues to witness limited growth during the year due to the loss of its major customer. If SanDisk’s share in this market segment drops to under 16% through the end of our forecast period, there could be a 5% downside to our current price estimate.
Declining Removable Storage Revenues
Revenues generated by SanDisk’s removable storage unit were down by 5% year-on-year to about $2.5 billion in 2014. This was roughly the same as the 6.5% annual decline faced by the company in this division in the last four years. The company posted low revenues in 2014 due to weakness in the retail channel which was driven by both declining prices, supply constraints and low demand for certain aging products. Within retail products, demand for storage cards for imaging devices was especially low during the quarter – primarily across Europe and Asia-Pacific. Although imaging storage revenues were sequentially higher than the previous quarter owing to seasonality, the revenue growth did not make a material impact to overall removable storage revenues. Management attributed the low sales number in European markets to macroeconomic conditions and geopolitical issues – which may continue through the coming quarters.
However, the company launched the iXpand flash drives for Apple devices and USB flash drives for Android-based devices in the last few months and more recently introduced flash memory cards designed for use in the automobile industry. In addition, it revamped its product line with the latest 200 GB micro SD card for portable devices. These efforts by the company could help boost unit sales, but declining global prices could imply limited top line growth. We forecast the net revenues generated by the removable storage division to decline by over 4% for the full year to $2.3 billion. In the long run we expect the revenues generated by removable storage to be around $2 billion through the end of our forecast period. If revenues decline to under $1.5 billion through the end of our forecast period, there could be a 3-4% downside to our price estimate for the company.
According to SanDisk’s estimates, its total addressable market (TAM) for smartphone, tablet and other portable device storage is expected to grow from over $12 billion in 2013 to nearly $18 billion by 2020. We expect that growth in the number of smartphones and tablets sold worldwide will contribute positively to SanDisk’s embedded storage division as all portable electronic devices use built-in storage in some form. Although the smartphone market is a mature segment in developed countries, the number of smartphones in use is expected to increase from around 2 billion currently to around 6 billion by 2020.  Increasing smartphone penetration in regions such as Asia-Pacific is likely to boost sales numbers for embedded storage products. However, much of the growth in Asia and other developing economies is expected to come from lower-cost smartphone manufacturers.  As a result, this could lead to a reduction in average selling prices per gigabyte for storage companies despite improving sales numbers. Moreover, with the potential loss of Apple as a customer, SanDisk could witness a further decline in average selling prices and resulting total revenues. We forecast SanDisk’s share in this market to decline from about 11.4% in 2014 to about 7.5% through the end of our forecast period. Consequently, we expect embedded storage to generate about $1.2 billion in revenues for SanDisk by the end of the decade from $1.5 billion in 2014. If revenues decline to under $1 billion through the end of our forecast period, there could be 4-5% downside to our current price estimate.Notes:
- SanDisk Reports Weaker Revenue Outlook, Wall Street Journal, January 2015 [↩]
- SanDisk Provides Business Update, SanDisk Press Release, March 2015 [↩] [↩]
- SanDisk Earnings Call Transcript Q4 2014, Seeking Alpha, January 2015 [↩]
- SanDisk cuts revenue outlook, Market Watch, March 2015 [↩]
- Samsung seals big SSD chip deal with Apple, Korea Times, March 2015 [↩]
- 6 billion Smartphones in Use by 2020, Yahoo News, September 2014 [↩]
- With Mobile Internet Ad Spending Growth of 210%, China Is The New Leader In The Industry, Daze Info, September 2014 [↩]