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Investment Overview for SanDisk (NYSE:SNDK)
SanDisk sells flash storage solutions to enterprises, channel partners and retailers. 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. Storage solutions include flash memory cards for usage in enterprise servers and arrays, smartphones, laptops, tablets, digital cameras, camcorders, USB thumb drives and game consoles.
Solid State Drives
According to our estimates, the Solid State Drive (SSD) segment is the company's most valuable operating segment, constituting approximately 28% 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 SSD market. The enterprise SSDs are storage units that cater to the enterprise data center market. Enterprise SSDs are used in high-capacity and/or high-performance data storage applications, and to accelerate enterprise application performance. Client SSDs encompass desktop computers, laptops, tablets and other computing devices wherein the drives are used in a stand-alone configuration in lieu of traditional hard drives. We estimate the global enterprise storage units to grow from 8 million units sold in 2013 to almost 25 million by 2020. The massive demand of Big Data, data centers and cloud-based storage will fuel growth and make this division a substantial portion of Sandisk's value.
The company's Removable Storage segment sells removable memory cards that are used in imaging devices such as cameras and camcorders, smartphones, tablets and e-readers. This division also includes the USB drives sold by the company. SanDisk is a leading seller of USB drives and memory cards for imaging devices. We expect the company to maintain its leading position in the market, although due to declining prices of storage cards we estimate that the revenues generated by this division will remain flat around present values in the coming years.
Embedded storage products include the iNAND embedded flash product line, the MCP iNAND solutions which combine NAND and mobile DRAM in an integrated package and custom embedded solutions which are used as embedded storage chips in smartphones, tablets, other portable devices such as media players and other wearables.
Below are key drivers of SanDisk's value that can present potential upside or downside to the current Trefis price estimate for SanDisk:
Average Selling Price per Gigabyte of Enterprise SSD
We currently forecast that ASP per GB for Enterprise SSD will decline to around $0.37 over our forecast period. However, there can be significant upside of roughly 10% if the ASP's only decline to $0.60. On the other hand, if average selling prices drop to around 15 cents per GB, we could see 10% downside to our price estimate.
SanDisk Market Share of Client SSD
We currently forecast that SanDisk's Market Share in the Client SSD market, which includes compute storage units for smartphones, tablets, notebooks and desktop computers, to increase from about 15% in 2013 to 22% in 2020. If SanDisk's share rises to over 30% of the combined addressable market, we would see 8-10% upside to the Trefis price. However, if the share remains constant at 15% through the end of our forecast period, we would see 6% downside to our estimates.
Cloud storage: a boon or a bane for flash memory? Cloud storage technologies such as Apple's iCloud, Microsoft's SkyDrive and Dropbox have allowed users and businesses the flexibility to store data remotely and access them at all times and from various devices which has reduced users' dependence on local storage.
Early cloud adoption indirectly resulted in increasing demand of flash storage solutions in devices (particularly mobile devices and tablets) as consumers chose portability over capacity driving up the use of NAND flash memory for such devices.
Since the memory capacity hit the ceiling, consumers are buying tablets and smartphones in increasing numbers but cloud storage is proving to be the most significant restricting factor as far as future growth in flash memory gigabyte consumption goes.
Cloud usage is fueling growth for data centers and enterprise storage over local storage in terms of both removable and embedded storage.
As a result, the increasing adoption of enterprise flash is shifting the end market for SanDisk
Trefis Forecast Rationale for Mobile Phone Flash Gross Margin
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.
- Product gross margins declined significantly in 2008 due to:
Product gross margins declined in 2007 due to excess industry supply, which led to price per Gigabyte declining faster than cost per Gigabyte.
- 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
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.
Trefis considered the following two factors for its forecast:
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- 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.
How 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: DCF Methodology
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