This Company Hasn’t Taken a Step Back, It Is Set to Launch Forward

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It has been around six months since I first took a look at flash memory maker SanDisk (NASDAQ: SNDK), and I immediately knew that it could be a winning investment. Since then, the stock has been on a roll, gaining around 23% and just reported yet another Street-beating quarter.

Chugging along nicely

Its fourth-quarter revenue of $1.54 billion was 21% higher on a sequential basis and ahead of the $1.53 billion consensus, while adjusted earnings of $1.05 per share blew past the consensus estimate of $0.76. However, the outlook wasn’t as rosy, with SanDisk projecting revenue between $1.23 billion and $1.3 billion, behind the $1.37 billion consensus. Also, fiscal 2013’s sales estimate of $5.3 billion to $5.6 billion trails the consensus of $6 billion.

A smart move

But this hasn’t deterred investors from being upbeat about SanDisk’s prospects, since the company has deliberately decided to cut down on NAND supply to keep prices stable. This is actually a smart move on SanDisk’s part, since beaten down prices of NAND products were one of the main reasons behind the company’s woes early last year.

The consolidation in NAND prices has been long coming, and prices are expected to improve this year as Micron Technology (NASDAQ: MU) CEO Mark Durcan said in August last year. Even Micron was struggling with declining NAND prices last year, but there were indications that supply cuts and increased demand would lend stability to prices. And the stock’s new found life in 2013, where it has appreciated almost 24%, indicates that a better pricing environment is on the way.

Hence, SanDisk is also playing its part to keep prices from being battered down again, and the results would probably be positive in the long run. The company is focused on keeping its momentum intact and won’t let another price decline hurt its prospects.

Riding mobile growth

SanDisk has been aggressively cutting down costs and selling high-margin products, as evidenced by a gross margin of 40% in the quarter as against 31% in the preceding one. The decline of the bundled memory card concept has helped the company’s embedded products business, leading to solid revenue and better margins. SanDisk’s iNAND revenue jumped an impressive 60% on a sequential basis, driven by sales to Apple (NASDAQ: AAPL).

SanDisk supplied embedded flash memory for the iPhone 5, helping its top line swell. And I won’t take SanDisk’s Apple account in a negative sense, and neither should you. Apple investors are feeling the pinch since iPhone sales weren’t as much as they had expected. But for SanDisk, a 29% year-over-year growth in iPhone sales is undoubtedly a positive.

Moreover, SanDisk had also supplied embedded memory for the iPad mini, which was one of the prime drivers behind a 48% jump in iPad sales. Thus, the company’s Apple account should be taken in a positive light since it is resulting in better revenue.

SSD rising

But SanDisk’s positives don’t end here. Its solid-state drive (SSD) business has been on a roll, with revenue tripling on a full-year basis. SSD sales account for almost 10% of SanDisk’s revenue, and the company is intent on taking this figure up to 25% by next year. Also, the company’s enterprise SSDs are being adopted at a decent pace.

SanDisk started shipping its high performance SAS SSDs to its “fourth storage OEM” and is also trying to land more customers. And SanDisk might well be able to win more designs for enterprise SSDs as it possesses industry leading 1.6 terabyte SAS drives.

The bottom line

The company sees client and enterprise SSD markets as catalysts this year along with NAND flash in mobiles. The application areas of flash memory are growing by the day and the growth of cloud computing further brightens up SanDisk’s prospects. Keeping all these factors in mind, it won’t be surprising to see SanDisk continue its solid recovery. A terrific forward P/E of 12 times and a fantastic PEG ratio of just 0.54 might give investors some more reasons to buy into the SanDisk story.

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