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Investment Overview for SanDisk (NYSE:SNDK)
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SanDisk sells flash memory cards* for use in digital cameras, camcorders, mobile phones, USB thumb drives and game consoles as well as higher storage capacity solid state drives for use in PCs, tablets and enterprise servers and arrays.
Flash storage technology allows data to be stored in a durable, compact format that retains the digital information even after the power has been switched off.
*A memory card (sometimes called a flash memory card or a storage card) is a small storage medium used to store data such as text, pictures, audio, and video, for use on small, portable or remote computing devices.
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Flash Memory Cards
We believe the Flash Memory card segment is the company's most valuable operating segment, constituting approximately 30% of its total value. The division is expected to be the primary revenue producer for the firm due to the rapid growth projected in the smartphone market. We estimate the global smartphone market to grow from 600 million units sold to approximately 2 billion units by 2019, the end of our forecast period. The mass adoption of smartphones throughout the world, which typically employ flash storage, will make this division a substantial portion of Sandisk's value.
Licensing and Royalties
We think that the company's Licensing and Royalties segment is its second most valuable segment, currently making up approximately 20% of total value. This segment is made up of revenues that SanDisk earns from licensing its patents to other companies. Since SanDisk has an extensive patent portfolio, we believe that it will be able to sustain this revenue stream. We project that these revenues will stay relatively flat until the end of our forecast period.
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Below are key drivers of SanDisk's vale that can present potential upside or downside to the current Trefis price estimate for SanDisk:
Average Selling Price per Gigabyte of Flash Memory
We currently forecast that the flash industry's ASP's will decline to around $0.01 over our forecast period. However, there can be significant upside of roughly 10% if the ASP's only decline to $0.03. On the other hand, if average selling prices drop to around half of a cent per GB, we could see 10% downside to our price estimate.
Licensing & Royalties
We currently forecast that SanDisk's Licensing and Royalty revenues will stay flat at $375 million over our forecast period. However, if we see these revenues rise to around $520 million, we would see approximately 5% upside to the Trefis price. However, if these revenues decline to around $250 million, we would see 5% downside to our estimates.
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Declining prices and oversupply
The NAND Flash business is cyclical in nature with each cycle comprising of four phases:
- Increased demand, high profitability:
Market is in undersupply with strong pricing and hence, high profitability. Profits are spent on capacity addition, with increase in supply after a period of 8-12 months.
- Oversupply and losses:
Market is marked by oversupply and falling ASPs. Focus is on driving cost efficiencies.
- Continued oversupply, losses run deeper:
Demand is pushed a little higher due to price elasticity. ASPs continue to fall and approach cash cost levels. Capex is delayed and fabrication units are run at lower capacity.
- Supply correction, return to profitability:
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Reduced supply leads to correction and demand sufficiency. ASPs see correction or possible rebound while costs continue to decline. Capex spending starts again.
Cloud storage: a boon or a bane for flash memory?
- Cloud storage technologies like Apple's iCloud, Dropbox and Microsoft's SkyDrive to name a few, have allowed users and businesses the flexibility to store data remotely and access them anytime, anywhere. This has reduced the users' dependence on local storage and has resulted in increasing the adoption of flash storage solutions in devices (particularly mobile devices and increasingly PCs) as consumers now go for portability over capacity.
- Consumers are buying tablets and smartphones in increasing numbers, driving up the use of NAND flash memory for such devices.
- However, while the cloud storage is proving to be a boon to flash memory at the moment, it is not hard to see it as the most significant restricting factor as far as future growth in flash memory gigabyte consumption goes. Cloud storage is currently a nascent technology, only capable of complimenting local storage thanks to bandwidth limitations, costly data transfer over cellular networks and a number of others factors.
- As cloud usage grows, coupled with the race for creating mobile computing devices of ever decreasing sizes, the flash storage capacity in devices can be expected to hit a ceiling sometime in the future.
- But again, cloud storage will need to be powered by storage technologies that are fast, i.e. have higher IOPS than the traditional hard disk drives. As a result the adoption of enterprise flash will likely increase and as far as SanDisk goes only the end market will change.
Trefis Forecast Rationale for Mobile Phone Flash Gross Margin
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Gross Margin represents Gross Profit as a percentage of Revenue. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold.
SanDisk does not report gross margins separately for each product line/end market. However, they do report "Product" Gross margins which we apply to all their flash product oriented divisions.
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- Product gross margins declined significantly in 2008 due to:
- Aggressive industry price declines which resulted in sale of products at negative gross margins
- Related charges which included three factors:
- Write-off of inventory reserves of $394 million of inventory on-hand and in the channel
- Charges of $121 million for adverse purchase commitments associated with under-utilization of Flash Ventures capacity
- Impairment in investments in Flash Partners and Flash Alliance of $83 million
- Product gross margins declined in 2007 due to excess industry supply, which led to price per Gigabyte declining faster than cost per Gigabyte.
We believe SanDisk's product gross margins would improve steadily over the coming years to reach 40% by 2015, which was the historical average from 2005-07.
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Trefis considered the following two factors for its forecast:
- New manufacturing / cell technology: SanDisk has come up with new flash technologies - x3 and x4. Most existing NAND flash chips have cells that each store one or two bits of data, whereas SanDisk has come up with x3 and x4 that store three and four bits, respectively. We believe these technologies will increase storage capacity and reduce the cost of flash-based products. SanDisk plans to transition soon to x3 chip (3 bits per cell) based on 32nm technology
- Also, SanDisk announced that the Toshiba-SanDisk JV in Yokkaichi, Japan will begin producing sub-30 nm NAND flash memory chips in the second half of 2010.
- Balancing of flash demand-supply:
Improvement in global economic conditions will improve consumer spending which will drive up demand for Flash based products and bring greater balance in the flash demand-supply equation. Industry supply bit growth is expected to be ~40% in 2009 compared with ~150% average annual growth for the past 4 years. This is mainly the result of flash companies aligning supply requirements with demand growth and realigning pricing.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
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