An Overview Of SanDisk And Our $50 Valuation

SanDisk (NASDAQ:SNDK) is a manufacturer of flash storage products, particularly flash memory cards, solid state drives (SSD) and USB drives. The company sells these products globally to original equipment manufacturers (OEMs) and directly to consumers via retail outlets. In 2011, the company generated around $5.5 billion in revenues, with a 40% gross profit margin. We think this figure will decline to around 30% by 2019 primarily due to the level of competition in the flash industry. About two-thirds of SanDisk’s revenues are generated from the Asia-Pacific region, which helps the company capitalize on the strong economic growth in this region. However, this also leaves it susceptible to adverse currency movements, which could affect its bottom-line over the longer term.

SanDisk has a leading position in the flash memory card segment with approximately 40% market share and in the USB drive industry with 20% market share. Despite these market leading positions, we think that the big growth opportunity is in SSDs, as the segment has increased from contributing 1% of total revenues in 2011 to around 10% in Q3 2012. 

See our complete analysis of SanDisk here

Flash Memory Industry Plagued with Oversupply

According to our estimates, SanDisk’s flash memory card segment makes up approximately 23% of the company’s value. Since 2008, this segment has been the primary growth driver for the company as it has seen revenues increase from $2.4 billion in 2008 to $4.0 billion in 2011. However, we expect revenues from this segment to decline to around $2.6 billion in 2019. This decline will be primarily due to a sharp fall in average selling price (ASP) per gigabyte of flash memory driven by an adverse supply-demand mix in the industry.

We estimate that average selling prices per gigabyte for flash memory declined from around $3 in 2008 to around $0.84 in 2011. As mentioned above, we think this trend will continue and forecast ASPs to decline to around $0.01 per GB by 2019. However, we think that upside to our forecast is possible if SanDisk and its competitors reduce capital expenditure to decrease supply in the NAND flash industry. If this happens and ASP declines only to $0.03, we would see 10% upside to our price estimate.

SSDs Are The High Growth Opportunity

SanDisk’s SSD division has been a big growth driver for the company in 2012. The division has seen its share of total revenues increase from 1% in 2011 to 10% during Q3 2012. In addition to this increase in revenues, SanDisk’s market share in the SSD industry has doubled, from around 2% in 2011 to 4% in 2012. We expect the company’s market share to increase over our forecast period and reach 10% by 2019 due to increasing SSD demand and SanDisk’s reputation of a being a leading provider of storage solutions. Overall, we think that PC SSD units sold will reach around 150 million by 2015, from 20 million in 2011, giving SanDisk an opportunity to drive top-line growth via SSD sales.

Cloud Threatens USB Flash Drive Relevance

SanDisk’s USB flash drive division is currently its smallest division and makes up around 2% of its total value. While this is a small division, we think it is important for SanDisk’s overall brand value. Since  SanDisk’s USBs are traditionally bought by retail customers on a unit basis, it is likely that customers first come across the SanDisk brand when they buy its USBs. Therefore, even though USBs don’t provide the financial value to SanDisk that other divisions do, SanDisk’s market share and performance of its USB drives is important as it can influence customers to buy SanDisk Flash memory cards or computers with SanDisk SSDs.

However, what’s troubling for SanDisk in regard to its USB division is the importance of cloud storage. Companies such as DropBox and Google are making cheap online storage options available, which is likely to eat into demand for local storage solutions. This is why we think that the ASP per gigabyte of USB storage will fall since USB manufacturers such as SanDisk will have to decrease prices to stay competitive with cloud solutions.

We currently have a $50 price estimate for SanDisk, which is approximately 15% above the current market price.

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