With Cost Leadership, SanDisk Remains in Charge

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Starting with just a technology concept, SanDisk (NASDAQ: SNDK) is now 25 years old and is one of the leading players in the flash market, a $25 billion + industry. As expected by SanDisk, the flash industry will continue to grow and reach $38 billion by 2016. Furthermore, the solid state drives are expected to double its market from 2012 to 2016, reaching $15 billion.

SanDisk’s edges

By focusing on increasing its mix of value-added solutions, SanDisk continues to improve its revenue, profit, and free cash flow. Through the joint venture with Toshiba, SanDisk continues to leverage its economies of scale, low cost, and advanced technology. By ramping up 19-nanometer technology in 2012, the second generation 1Y technology will start its production in Q3, which will be followed by 1Z technology (ready by late 2014). While both 1Y and 1Z technologies will establish SanDisk’s cost leadership for 2014 and 2015, respectively, SanDisk’s 3D NAND will be unmatched by other competitors (more scalable and efficient with lower dye size), as claimed by the management.

Strong demand and higher margins

With the increasing mobile trend, the demand for mobile devices continues to be strong. SanDisk also benefits from a growing need for enterprise applications. Solid demand growth and moderated supply increases should lead to a stable industry environment for SanDisk. As for the gross margin, SanDisk’s gross margin has increased to 38 - 44%, which is 300 basis points higher than the long-term financial model used by the management before. On the other hand, due to increased R&D, there is a 200 basis point increase for the operating expense, resulting in a 100 basis point improvement for overall operating margin to 21 – 25%. The management believes that operating margin range can be further improved in the future with growing sales from solid state drive.

Other peers

Seagate (NASDAQ: STX), a global leader in hard disk drives and storage solutions, just recently unveiled its new portfolio of flash-memory solutions, including its first client solid state drive and the next-generation enterprise SSDs. Seagate continues to solidify its flash-based storage offerings and now has the broadest portfolio of storage products in the industry.

Western Digital (NASDAQ: WDC), on the other hand, is working with SanDisk to target the market of hybrid disk drives. By collaborating with SanDisk, which has joined ventures with Toshiba, Western Digital can gain steady access to NAND supply, which is expected to become tighter due to reductions in NAND production. The demand for hybrid disk drives is expected to boom with its right mix of storage size and price.

Bottom line

By moderating its supply, SanDisk aims to stabilize the price in the growing market with strong demand. With its technology leadership, SanDisk is expected to enjoy cost advantages thoroughout 2014 and 2015 during its transition into 3D NAND technology. With improving margins, a solid balance sheet and a strong cash flow, SanDisk will continue to deliver for shareholders.

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Nick Chiu has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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