Solid-State Storage Leads To A Strong 2013 For SanDisk, Stock Worth $75

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SanDisk

SanDisk (NASDAQ:SNDK) announced strong quarterly results last week, just beating the upper end of its top-line guidance, generating $1.73 billion in revenues in the fourth quarter. The company reported non-GAAP net income of $1.2 billion for 2013, more than twice its net income in 2012. Earnings per share increased more than 150%, from $1.70 in 2012 to $4.34 per share for the full year. The growth in revenues was largely driven by a significant increase in contribution of solid state drive (SSD) sales, which went up to 19% in 2013 from only 9% in 2012, which was in line with our expectations. [1]

A slight yen devaluation during the quarter led to a 6% decline in the company’s cost of revenues. This in turn led to better gross margins since the company did not decrease its average selling price (ASP) per gigabyte of memory sold. [2] Additionally, the company posted healthier margins and a higher net income than last year, primarily due to a better mix of high-margin enterprise-class SSDs over embedded and client SSDs. We expect the company to continue to benefit from the growing enterprise SSD market, based on which we have revised SanDisk’s price estimate to $75, which is slightly higher than the current market price.

See our full analysis for SanDisk’s Stock

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Enterprise-Class Solid State Drives Key For The Future

SanDisk generated more than a fifth of its revenues by selling SSD solutions in the last quarter. Comparatively, the contribution of these high-margin SSD solutions was less than 10% in Q4 2012. With user data increasingly moving to the cloud, the storage demand from data centers is increasing. Since SSDs provide efficient storage through higher Input/Output per Second (IOPS) and low latency, they are increasingly becoming the preferred option for enterprises. [3]

Over the next few quarters, the company expects the contribution of SSDs to go up to 25% of its net revenues due to the expected growth in enterprise storage demand and its new product line. If the company meets its expected target, it would provide a substantial boost to earnings, which we have incorporated in the current model. Although the company could face stiff competition from major storage providers such as Western Digital (NASDAQ:WDC) and Seagate (NASDAQ:STX) entering the enterprise SSD market, we expect the company to continue its strong growth in the SSD arena.

The Newly-Launched ULLtraDIMM Gets IBM Branding

The company announced the release of its latest product, the ULLtraDIMM Solid State Drive a few days before the earnings call. [4] The ULLtraDIMM is a first of its kind flash storage product which is very different from other products since it is connected via the DIMM slot on the motherboard, typically used for RAM memory. Using RAM slots for memory storage is a new concept and the company expects it to catch on as a cheaper alternate to regular SSDs. [5]

SanDisk-owned SMART Storage and Diablo Technologies Inc worked together on the ULLtraDIMM, which IBM has now started rebranding as eXFlash and incorporated it on its platform. [6] This gives a huge boost to SanDisk’s OEM sales, which are part of its commercial channel. In the coming quarters, we expect the commercial channel to have a higher contribution to SanDisk’s top line on the back of its Avnet partnership.

The Yen Factor

According to the company’s management, the low cost of sales over the last three quarters was primarily driven by the declining yen as the company sources many products from Japan. Moreover, management expects the yen devaluation to give a slight boost to the bottom line figures in the next quarter as well. Though the Yen devaluation has benefited the company in the last few quarters, it is difficult to judge the long term impact of the currency fluctuation on the cost of revenues or margins. Moreover, the company lists Yen fluctuation as a possible risk to its production costs.

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Notes:
  1. SanDisk Quarterly Metrics, SanDisk Investor Relations, January 2014 []
  2. SanDisk Q4 Earnings Call Transcript, Seeking Alpha, January 2014 []
  3. Flash Memory Is Changing How Companies Buy Storage, Forbes, November 2013 []
  4. SanDisk ULLtraDIMM Press Release, SanDisk Investor Relations, January 2014 []
  5. SanDisk’s ULLtraDIMM Is An SSD On A Ram Stick, The Geek, January 2014 []
  6. IBM Rebrands ULLtraDIMM Memory Channel Storage, Tech Target, January 2014 []