Xbox 360 Partnership Offers Little Upside for SanDisk’s Stock

by Trefis Team
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Microsoft (NASDAQ:MFST) recently selected SanDisk (NASDAQ:SNDK) to supply Xbox 360 branded flash drives that can be sold alongside Xbox 360 consoles.  Even if every buyer of a new Xbox 360 console opted to additionally purchase a SanDisk-made Xbox 360 flash drive, the upside for SanDisk’s stock would be less than 1.5%.

Below we discuss the significance of SanDisk’s Gaming Console flash memory business for SanDisk’s stock and the best case scenario for SanDisk based on the additional revenue opportunity created by Xbox 360.

Gaming Console Flash Cards less than 3% of SanDisk’s stock

We estimate that Game Console Flash Cards constitute less than 3 % of the Trefis price estimate of $30.15 for SanDisk’s stock.

Xbox 360 Update Leads to SanDisk Opportunity

Beginning next month,  Xbox 360 consoles will have support for external USB flash drives.  New consoles sold will have updated software to support the external drives and existing Xbox 360 consoles will be able to update their software through Xbox Live.  The underlying idea is to help gamers to save their profiles, games and demos in addition to provide space for storing the media content downloaded through Xbox Live.

The Xbox 360 software update will be made available concurrently with the new SanDisk-made flash drives.  Although Xbox users can use third-party flash drives, the Xbox 360 branded drives will be promoted by Microsoft to potential new buyers of Xbox 360 consoles.

Best Case Scenario for SanDisk: $225 million Additional Revenues in 2010

We estimate that Xbox 360 can add as much as $225 million of revenues to SanDisk’s gaming console flash card business if:

1. Every Xbox 360 new buyer in 2010 opts for a 16 GB Xbox branded flash drive

2. SanDisk sells its 16 GB flash drives to Microsoft at almost retail prices

Based on this best case scenario, we calculate the $225 million of incremental SanDisk revenues by estimating the number of Xbox 360 units sold and the average price of a 16 GB SanDisk flash drive:

1. 11 million Xbox 360 consoles shipped in 2010

We estimate that 11 million Xbox 360 consoles will be sold in 2010 and this will increase to 19 million by the end of Trefis forecast period. This implies 11% market share for Xbox 360 amongst the 102 million gaming consoles estimated to be sold in 2010.  This share is expected to increase to 14% over our forecast period.

As the shipments are expected to start in May, we estimate SanDisk will have a “best case” opportunity to sell about 9 million flash drives, representing slightly more than three-fourths of the expected Xbox 360 sales since many of these sales will occur during the year end holiday period.

2. SanDisk makes $25 per Xbox unit

Microsoft is pricing the 16 GB Xbox 360 branded SanDisk flash drive at $70 and including one month of Xbox Live Gold Membership to help entice buyers.  We estimate SanDisk charges $25 per flash drive to Microsoft which is the average selling price for SanDisk’s 16 GB flash drives.

Based on the best case scenario of 9 million Xbox 360 branded flash drives sold at an average price (for SanDisk) of $25 per unit, the extra revenue opportunity for SanDisk in 2010 is about $225 million.

You can modify the forecast below to see how an increase in SanDisk’s gaming console revenue from the expected $160 million in 2010 to about $385 million would lead to an impact on its stock price of less than 1.5%.

For additional analysis and forecasts, here is our complete model for SanDisk’s stock.

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