Sandisk: Good Growth Prospects Going Forward in 2H12
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SanDisk (NASDAQ: SNDK) is a leader in three-bit-per-cell NAND technology, which enables it to enjoy higher margins than its NAND peers. We believe that solid state drives (SSD) will be the next growth story for Sandisk and expect NAND producers to benefit significantly from rapid adoption of SSDs. Though NAND pricing has been weak recently, we expect it to improve toward the latter half of the year driven by strong demand with no new capacity coming online this year.
Implications of NAND production drop by Toshiba:
Despite recent macro-economic weakness, we expect that NAND supply/demand balance will improve in 2H12. SanDisk's slight beat on Q2 non-GAAP EPS gives us increased confidence that the NAND industry cycle has bottomed. We believe Toshiba's recent announcement that they will cut NAND production by 30% will be a positive for overall NAND supply/demand balance. NAND prices reached an inflection point soon after the last time Toshiba announced a cut in December 2008; we expect NAND prices to follow the same trend even now. We believe that SSDs including Cache/Hybrid HDDs will keep driving demand in 2H12 and beyond. With the GB/wafer growth falling (as technology advancement begins to slow down), we expect to see a large gap developing between supply and demand that must be filled with additional wafer capacity. We believe that with the balance in supply/demand, we will see firmer pricing and hence a margin recovery for Sandisk going into 2H12.
SanDisk product mix improving:
Product mix and an over reliance on removable flash clearly worsened the over-supply issue for SanDisk. SanDisk's over-reliance on removable flash hurt their gross margins more than the rest of the industry as removable flash was the area which suffered the most and which had the most volatile ASPs. SanDisk also suffered due to their over-exposure to smartphone underachievers like HTC and RIM (NASDAQ: BBRY) in embedded solutions. Recently, however, SanDisk has made an attempt to diversify away from removable flash with new design wins in embedded (smartphone and tablet) and SSDs (PCs and enterprise). Recent design wins include:
- Custom embedded solutions which could be for the new Apple (NASDAQ: AAPL) iPhone 5.
- Other embedded solutions which might include Samsung and Google (NASDAQ: GOOG) smartphones/tablets.
- Several PC SSDs (including the Asus Zenbook Prime UX31A, Lenovo ThinkPad Edge- series notebooks and the Fujitsu Lifebook models).
- Several Enterprise SSDs.
Going forward, we believe that SanDisk's new design wins in embedded and SSDs will improve Sandisk’s product mix and generate incremental revenues in the future.
Strong balance sheet and better than expected guidance:
3Q12 revenue guidance of $1.15-1.25 billion (up 11-21% QoQ) was inline with the sell side consensus estimate of $1.22 billion but still better than some of the buy side expectations. SanDisk has the best balance sheet among its memory peers with its net cash accounting for 40% of market cap. Sandisk’s cost guidance remained solid as the company expects to be in the high end for 2012 of the 25-35% cost decline range envisaged at the beginning of 2012. Costs have already declined -11% in Q1 and -9% in Q2 sequentially.
In the long term we are bullish on Sandisk, as NAND technology is fundamental to key trends in both smartphone computing and Cloud investment. Although 1H12 has seen oversupply, we expect NAND demand growth to outpace supply, bringing the industry back into balance in 2H12. The improving product mix will provide a new growth opportunity for Sandisk going forward. As we believe that Sandisk could generate better than guided revenues going into 2H12, we rate it as a buy.
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