A High-Flying Stock That Your Portfolio Should Have

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’s (NASDAQ: SNDK) second-quarter results were simply outstanding. One look at the numbers and the margin by which it beat consensus estimates will certainly leave you impressed. However, at least to me, SanDisk’s latest results don’t come as a surprise as I’d expected the company to deliver a beat and get better going forward.

Hammering the estimates

There are some solid catalysts that have been pushing SanDisk’s performance to new highs, such as robust demand for its products and strength in pricing of NAND flash memory. These factors helped the company post a terrific increase of 43% in revenue, which grew to $1.48 billion in the quarter, comfortably ahead of the $1.4 billion consensus.

The jump in net income was even more impressive, as it jumped to $262 million in the quarter from just $13 million last year. On an adjusted basis, SanDisk earned $1.21 per share in the quarter, handsomely beating the consensus estimate of $0.93 per share. What’s more, SanDisk saw its gross margin improve to 46.7% in the quarter from 28.3% in the same period last year, on a non-GAAP basis.

So, while previous quarter’s results were impressive, the outlook was even better. SanDisk is looking at revenue between $1.53 billion and $1.58 billion in the current quarter, which is again better than the $1.49 billion that analysts had estimated. Moreover, the company bumped up its revenue guidance for the full year $5.95 billion to $6.05 billion, and this is the second time in two quarters that it has raised its full year outlook.

It is clear that SanDisk has hit their stride, and I believe that the good times are set to continue. Why? Let me tell you one by one.

Strong pricing to continue

Memory makers are adding lesser capacity than required in an effort to provide support to NAND flash pricing, and SanDisk is no different. Earlier in May, CEO Sanjay Mehrotra had stated that chipmakers will be adding less capacity, even though demand for flash memory is expected to rise due to rise in sales of smartphones and tablets. So, with capacity additions expected to be lower than actual demand, simple economics tells us that NAND prices will continue their journey north.

SanDisk will keep its supply growth on a leash going forward and it is looking at an even better gross margin performance in the current quarter. It is looking at 47%-48% in gross margin in the ongoing quarter, driven by the demand-supply balance and better pricing. Hence, a better gross margin performance should help SanDisk’s earnings grow going forward.

High-margin sales

SanDisk has been constantly improving its product mix and this was one of the reasons why it turned in a stellar performance in the previous quarter. Sales of embedded products and solid-state drives (SSDs), which carry higher margins, have been strong and the trend is expected to continue going forward.

SanDisk has been expanding its customer base for embedded products while it has completed a number of customer qualifications in client SSDs. Shipments of its client SSDs developed with its 19-nanometer technology are already underway, and revenue is expected to start flowing in from the current quarter.

Coming to enterprise SSDs, the company has been growing revenue in double-digits for the past three quarters and is intent on keeping this momentum intact. SanDisk recently announced that it will be acquiring SMART Storage Systems, strengthening its portfolio of enterprise SSDs. This acquisition is expected to add a couple of new Tier 1 storage OEM customers to SanDisk’s portfolio, and give it the advantage of having its products qualified at six out of the top seven OEMs.

So, SanDisk is certainly making the correct moves to expand its business and if this stock is still not on your radar, then it’s not too late to jump in now. But wait, let me give you one more reason why I think you should buy SanDisk.

Riding smartphone growth

Selling flash memory cards and embedded memory for smartphones is a big business for SanDisk. Management stated over the previous conference call that 900 million smartphones are expected to be shipped this year along with 200 million tablets. In addition, the company is also counting on smartphone growth in China and expects its products to sell well in the region.

Also, SanDisk expects growth in sales of expandable memory cards as many OEMs are including a memory slot on their phones. SanDisk’s new 64 GB micro SD card is among the fastest out there as the company looks to tap this trend. And as far as embedded solutions are concerned, a slot in Apple’s (NASDAQ: AAPL) upcoming iPhone should drive revenue higher as well.

SanDisk had landed a spot in the iPhone 5, supplying flash memory to Apple for the device. The solid bump in revenue in the previous quarter was probably a result of Apple getting ready to ramp up production and reports suggest that the iPhone is already in production according to leaked images (via 9to5mac). But there’s more to the Apple story, as it is purported that Apple is also preparing a lower cost option for the emerging markets.

While a cheaper iPhone would probably help Apple unlock the emerging market code and also make its presence felt in China, it would also help SanDisk to sell more of its flash memory if it manages to land a spot in the cheaper version.

Final words

SanDisk is growing at a terrific speed and has got some solid tailwinds behind it. As such, even though the stock trades at a seemingly expensive 31 times earnings, I think that its rapid earnings and revenue growth is enough to justify this premium. Hence, if you’re still on the sidelines regarding SanDisk, I think it would make sense to jump in as the fundamentals tell me that the journey north is set to continue. 

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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