Turnaround Complete, Now is the Time to Buy this Stock
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Flash memory maker SanDisk (NASDAQ: SNDK) has officially turned its fortunes around. SanDisk was hurt by low demand and weak pricing in the first half of the year, but the company’s last two quarterly reports show that it is back in business.
The signs of a turnaround were quite evident in SanDisk’s June quarter report. An array of cutting edge products to ride the growth of mobile computing devices seemed like a perfect recipe for an outstanding future. In addition, a gradual stabilization in prices of NAND flash was also expected to help SanDisk affect a turnaround.
Considering all these factors, the fact that SanDisk has appreciated 25% over the last three months and posted a terrific third quarter doesn’t come as a surprise. The company posted revenue of $1.27 billion, 23% higher on a sequential basis and ahead of consensus estimates. The bottom line performance was even better, as SanDisk posted earnings of 48 cents a share, resulting in a positive surprise of 45%.
SanDisk’s embedded flash memory sales grew strongly, primarily driven by sales to a “leading OEM customer,” which turned out to be none other than Apple (NASDAQ: AAPL). SanDisk supplied NAND flash memory for the iPhone 5, a fact which came to light when IHS iSuppli opened up an iPhone. Also, the company’s retail sales showed strong growth, helped by rising demand for smartphones and tablets.
In addition, improved NAND pricing also drove SanDisk’s results. SanDisk’s peer, Micron Technology (NASDAQ: MU) had stated earlier this year that it was looking for an upswing in NAND prices. But Micron was counting on strong demand for mobile devices to push up its sales that time.
However, NAND makers, including Micron, tightened supply in order to arrest the price decline. This helped SanDisk, and its Apple contract proved to be the icing on the cake as SanDisk was able to capitalize on better pricing with solid sales. Moreover, Micron expects NAND pricing to improve further next year, and this certainly bodes well for SanDisk as well.
Alert! Catalysts Ahead
After reading all the points mentioned till now, one might feel like getting some SanDisk shares for their portfolio. But wait; there are some more catalysts that should cement your bullish feeling about SanDisk.
Firstly, presence in the iPhone 5, and more importantly in the Apple camp, is a big plus for SanDisk. The iPhone 5, despite failing to satisfy some analysts (who now decide how many phones people should buy), has got off to a strong start. Demand for the iPhone 5 is huge and Apple is finding it difficult to satisfy demand (and taking hits on the share price). For Apple investors, these might be troublesome times but for SanDisk investors, there can’t be a better time.
The iPhone 5 is generating enormous demand and hence, the company will be making huge quantities of the product. This means more sales for SanDisk as it is supplying NAND flash to the device. And if SanDisk manages to land a spot inside the iPad or the upcoming smaller iPad which can be a roaring success, investors can expect to see windfall gains.
But Apple is not going to be the only driver for SanDisk. The company’s solid-state drive (SSD) products are being adopted at illustrious OEM’s, such as Lenovo for its ThinkPad X1 Carbon Ultrabook. Moreover, with the advent of Windows 8 Ultrabooks, demand for SSDs should go up further.
Its enterprise SSD products are also well-placed to benefit from growth in data centers and growth in servers and storage area networks, which are being built to drive cloud implementation. All these factors should help SanDisk rake in higher revenue going forward.
The Bottom Line
After a tumultuous first six months this year, SanDisk has recovered remarkably and looks set to get better. Management expects improvement in all aspects of business in the current quarter, be it revenue, gross margin, earnings or cash flow. Moreover, the company expects to perform even better next year, driven by the growth in smartphones, tablets, Ultrabooks and cloud computing. Keeping all these factors in mind, it would indeed make sense to get some SanDisk shares for your portfolio.
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