Flash storage provider SanDisk Corporation (NASDAQ:SNDK) witnessed robust solid state drive (SSD) product sales last year that drove the company’s rally in back in 2014. SSD revenues jumped by 60% through the year to $1.9 billion, due to which SanDisk’s stock price rose from about $70 in early 2014 to $105 by the year end. Subsequently, the company has endured a difficult period of low product sales through the first two quarters of 2015, with its net revenues declining by about 20% over the comparable prior year period to under $2.6 billion. In March this year, the company revised its Q1 revenue guidance anticipating weakness in its SSD revenue channel. As a result, its stock plummeted by 18% in a single day. Additionally, the company had a weak Q2 in terms of product sales, with meaningful growth coming from only the enterprise SSD division.
The company has since continued to refresh its enterprise SSD product line as evidenced by the introduction of enterprise SSD drives for cloud storage last month. Earlier this month, SanDisk announced the agreement with Nexenta Systems to offer all-flash storage arrays integrated with the software-defined storage platform of the latter.  Below we take a look at how the combined hardware and software offering of SanDisk and Nexenta can boost sales of SanDisk’s enterprise storage division.
We maintain our $66 price estimate for SanDisk’s stock, which is about 20% higher than the current market price. SanDisk’s stock price has fallen by about 50% since the beginning of the year. The stock was trading at a year-to-date low of $48 in late August before recovering to the present level of about $55.
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Nexenta Systems And SanDisk Partnership
Nexenta Systems is a California-based software-defined storage (SDS) solutions provider with an emphasis on open source-driven storage solutions. The company defines its key competency as Open Software-Defined Storage or OpenSDS, which basically means that the company exclusively integrates open-source software only. Moreover, the storage solutions provided by Nexenta are accessible on all platforms, operating systems, hardware, protocols or apps. Storage products are accessible on multiple cloud platforms including VMware (NYSE:VMW), Citrix, Cloudstack, Microsoft (NASDAQ:MSFT), Openstack and Amazon Web Services (NYSE:AMZN).
Nexenta Systems and SanDisk Corporation announced an agreement to provide integrated storage solutions with Nexenta’s flagship NexentaStor OpenSDS software platform with SanDisk’s all-flash InfiniFlash IF 100 storage systems.  The integrated OpenSDS and all-flash array can scale up from 64 TB of data in a default configuration to two petabyte (1 petabyte = 1,000 terabytes) configurations. The storage system is a cost-effective solution for data centers helping Big Data challenges including virtualization, scaling up, data analytics.
The cost-effectiveness is highlighted by low-power consuming flash storage and relatively lower cooling costs associated with the product. The InfiniFlash IF100 integrated with NexentaStor has a starting price of as low as $1.50 per GB of raw storage, which is much lower than competing products. The Dell SCv2000 entry-level array costs over $4 per GB raw, Kaminario K2 v5.5 starts at about $3 per GB raw, while the latest Dell all-flash arrays of the SC series are priced at about $1.66 per GB of raw storage. Comparable products also include the Tegile IntelliFlash systems that cost about $1.50 per GB of raw storage (assuming a data reduction rate of 3:1 bringing the cost from $0.50 per effective GB up to $1.50 per GB of raw storage). 
The other market segment that the low-priced all-flash array from SanDisk and Nexenta can challenge is the high-end enterprise grade hard drives used in storage arrays. Most 3.5″ form factor enterprise hard drives with 15,000 RPM or 10,000 RPM that are used in storage arrays for optimum performance cost much lower than flash storage on a price per GB basis. Enterprise hard drives can cost as little as 4-5 cents per GB.  Despite falling prices of flash-based storage and mass-scale adoption of flash storage solutions, it could still be a few years before prices converge. However, a better metric for comparison in these cases is price per unit performance (input/output operations per second or IOPS) or performance (IOPS) per GB. On comparing price per IOPS or IOPS per GB in this case, flash storage significantly outperforms hard drives making it a more viable option for Big Data storage and enterprise customers.
SanDisk’s Enterprise SSD Division
In the most recent quarter, SanDisk’s enterprise SSD sales rose by over 32% year-over-year to $173 million. Similarly, enterprise SSD revenues have risen by a massive 64% y-o-y to $360 million. Although the rise in revenues was slightly lower than the 140% annual growth observed in 2014, enterprise SSD product sales was the only area of revenue growth for the company. Most of the company’s revenue streams have suffered in the first half of 2015. Client SSD revenues fell by 55% over the prior year period to $308 million in the first half of the year, while embedded storage (-6%), removable storage (-16%) and other revenues (-18%) also faced substantial – but comparatively modest – revenue declines in the first half of the year.
Barely a month after SanDisk reported robust growth in enterprise SSD product sales, the company announced the release of the CloudSpeed Ultra Gen II enterprise-grade SSD for cloud service provider and software-defined storage vendor environments.  Within the enterprise SSD division, the company expects customers to shift from low-end SATA enterprise-grade SSDs to high-end SSDs and PCIe storage solutions giving SanDisk a larger market to cater to. The addition of cloud storage-specific SSDs and all-flash array with Nexenta’s software-only platform gives SanDisk the edge in the enterprise market. Moreover, SanDisk’s competitive pricing could help the company capture a larger market in the coming quarters.
SanDisk’s refreshed product portfolio and agreement with Nexenta on the software-defined storage platform indicates an enhanced focus by the company on its enterprise storage segment. According to IDC, the all-flash array market (AFA) market size was estimated at about $1.3 billion for the year.  The AFA market is expected to grow rapidly to become a $3.5 billion market by 2018.  We currently forecast SanDisk’s share in the enterprise SSD market to rise from 12.4% in 2014 to about 18% through the end of our forecast period. If the market share touches the 25% mark by the end of our forecast period, it could imply a 7-8% upside to our price estimate for the company’s stock. You can modify the interactive chart below to gauge the effect a change in SanDisk’s enterprise SSD market share would have on our price estimate for the company.Notes:
- SanDisk and Nexenta to Deliver the First Open Software-Defined Storage (OpenSDS) All Flash Array in the Market, SanDisk Press Release, September 2015 [↩]
- SanDisk and Nexenta to Deliver the First Open Software-Defined Storage (OpenSDS) All Flash Array in the Market, Nexenta Press Release, September 2015 [↩]
- Nexenta, SanDisk hop into bed, one thing leads to another – now they’ve got a 512TB flash brat, The Register, September 2015 [↩]
- Let’s talk about the (real) price of flash and spinning disks, The Register, March 2015 [↩]
- SanDisk Enables Performance & Density Gains for Cloud Infrastructures with New SATA SSD, SanDisk Press Release, August 2015 [↩]
- Flash-Based Array Market Proving to Be More Than Just a Flash in the Pan as Market Soars Past $11 Billion in 2014, IDC Press Release, January 2015 [↩]
- The Flash Based Array Market, Storage Networking Industry Association, April 2015 [↩]