Will New Cloud Storage Technology Impact SanDisk's Stock Price?

Kiran is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

SanDisk (NASDAQ: SNDK) is a leader in NAND flash storage solutions and software. NAND is a flash storage technology which independently retains data without power. It reduces the cost-per-bit, and elevates chip capacity that enables flash memory to compete with traditional storage devices such as hard disks.

I believe over the next few years, rapidly growing demand for smartphones will be a key revenue driver for SanDisk and the overall industry. However, steady growth in cloud storage technology does present a threat for the industry. It is essential for investors to comprehend the key industry trends and company fundamentals to make the right investment choice.

According to the projections offered by Trefis, smartphones have witnessed a robust growth in NAND content. The number of smartphones sold globally reported a 40% year-on-year growth rate during the last 5 years. The demand of higher resolution pictures and high definition videos has exponentially risen with radical enhancements in media content. This underpins the growing demand for local storage capacity.

The increasing use of applications in smartphones has elevated the need for a higher storage capacity. The average capacity of flash memory in smartphones is expected to grow at around 20%-25% in the following years. Going forward, demand for smartphones will largely define the progress of the industry.

Quick snapshot of Sandisk’s first quarter results

SanDisk announced its first quarter results recently. The company reported 11% growth in revenue, which is higher than the industry average of 10.4%. Growth in revenues led to a robust increase net income, resulting in a higher than expected earnings per share. Net income increased 45.3%, exceeding both the S&P 500 and average industry growth rate.

Furthermore, free cash flow also surpassed the industry average, which is indicative of a relatively higher equity valuation than its peers.

 Why is Cloud storage technology threatening?

Cloud storage technologies enables users and businesses the suppleness to store data and access it at their convenience. Many believe cloud storage technology could pose a threat to the potential growth of flash memory consumption.

Cloud storage is a nascent technology, which is only capable of supporting local storage due to bandwidth limitations and highly expensive data transfers. As the demand for cloud usage grows, the demand for flash storage could decline drastically. Furthermore, the expected growth of 20%-25% in flash memory is relatively lower than historical growth rates due to cloud storage services such as iCloud and Dropbox.

However, It must be noted that cloud storage would need to be propped up by storage technologies that are much more advanced than traditional hard disks. Therefore, I don't see cloud storage technology as a serious threat for SanDisk in the long run.

Signs of growth in average selling prices

At present, the industry is suffering from excess supply. According to projections offered by Trefis, chip manufacturers increased production output in order to match the tremendous growth in smartphone sales and a possible shift in consumer preference towards ultrabooks.

However, expected growth in ultrabooks did not match initial estimates, leading to an oversupply in the NAND memory market. The excess supply coupled with the current macroeconomic environment and rapidly increasing competition further pulled down prices.

As a cost-cutting initiative, SanDisk invested in next-generation process technology. At the macroeconomic front, there is growing optimism due to the reinstated balance in demand-supply ratio through massive reductions in production capacities. 

Under the circumstance,s several small players were forced to shut down production facilities, which lead to market consolidation (Demand and Supply Equilibrium). Once the supply adequately balances itself to demand, I expect the average prices to resume historical patterns.

Competitive landscape in the industry

Micron Technology (NASDAQ: MU) is one of SanDisk's premiere competitors in the NAND flash storage market. It generates the highest percentage of its revenues from NAND Flash Memory at around 44%, which is followed by Core Dram Memory at around 39%. The remaining revenues are spread between NOR Flash Memory, Imaging, and Micro Display.

Micron presently holds a 15% market share in the NAND flash market. According to the projections offered by Trefis, its market share will gradually surpass 16% during the next six years. However, if it manages to blow past the 18% mark, then there may be a strong upside to its present stock price.

The NAND flash storage division holds a 52% value it its present stock price; hence, investors can expect Micron’s stock to grow parallel with the overall market. Any fall or increase in demand will have a direct impact on Micron's stock price.

Seagate Technology (NASDAQ: STX) also competes with SanDisk. It manufactures HDDs (Hard Disk Drives) however; it has now switched its focus on manufacturing SSDs (Solid State Drives) and hybrid disks. The company firmly believes in the radical nature of SDDs and considers it as the future of storage devices.

Seagate Technology has well diversified revenue streams. It designs client compute applications for netbooks and notebook storage applications. the company generates a staggering 56% of its overall revenues through this division. This is followed by Enterprise & Cloud storage and TV/DVR consoles, at around 25% and 19% respectively.

According to valuation offered by Trefis, the client compute applications division is 52% of its present stock price, which is indicative of its importance. Future growth in its stock price will heavily rely on how industry trends favor the company.

Favorable trends

During the last quarter, SanDisk exhibited promising signs, as it reported growth in several facets of the business. The industry trends further add optimism, with improvements in average selling prices and rapidly escalating demand for smartphones.

Going forward, I believe the growing preference for cloud storage -- which appears to have stagnated SanDisk's growth -- will not have a lasting impact. In the long run, cloud storage technology will be propped up through radically advanced  technologies, which are superior to traditional hard disk drives.

This presents as an opportunity for SanDisk  to bolster and sustain its future growth. Need for such advancements will not allow the cloud storage technology to have a lasting impact on SanDisk's growth. Investors with a long term horizon should hold onto SanDisk stock, as the company's long-term fundamentals and industry trends are promising. 

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