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SanDisk: A Good Long-Term Buy

May 21, 2014 | About:
Vinay Singh

Vinay Singh

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SanDisk (SNDK) offers flash memory storage solutions. Flash memory storage consists of NOR and NAND technologies, which retain data independently even without power. Recently, it was announced that SanDisk plans to build a flash memory manufacturing plantalong with Toshiba in Japan for $4 billion. SanDisk has entered into a strategic joint venture with Toshiba in order to manufacture chips with a circuit line width of 16nm to 17nm.

The increasing density of memory chips on wafer has led to declining cost and price per bit, which has propped up the demand for NAND flash memory. The flash memory market is highly elastic; that is, a reduction in price per gigabyte is expected to drive up the demand. So, companies with significant supply hold a distinctive competitive edge over competitors.

Moreover, rising demand for smartphones and tablets is increasingly driving this industry. During this year, an estimated 900 million smartphones are expected to be shipped with tablet volumes reaching 200 million. It should be noted that rising demand for storage expansion has resulted in non-iOS devices increasingly offering card slots for storage expansion.

Going forward, SSD's (solid-state drives) are expected to be a key revenue driver for the NAND flash memory market. According to recent analyst estimates, the demand for SSDs is expected grow at around 55% from 2013 to 2017. The rapidly growing popularity of smart devices coupled with robust demand across the globe for SSD solutions indicate good times for SanDisk.

SanDisk’s Recent Strategic Acquisitions

Recently, SanDisk Ventures, a strategic investment arm of the company, announced investment in Pebbles Interfaces, which is a developer of 3D gesture interaction hardware and software.This particular investment will enable the company in offering its flash memory storage solutions to new product types and enter unexplored segments.

Other than investment in Pebbles Interfaces, in July, SanDisk announced the proposed acquisition of SMART Storage Systems for $307 million in cash and certain equity-based incentives. SMART develops SSD's based on SATA and SAS storage protocols. The acquisition will grant SanDisk a direct access to a massive $1.6 billion market for enterprise SATA products, whilst strengthening its existing product portfolio.

In addition, SanDisk will further gain access to SMART's Guardian technology, which will certainly enhance the reliability and endurance of its SSDs. Moreover, the company will have the opportunity to penetrate and incrementally develop on two new Tier 1 storage OEMs, enabling SanDisk in positioning itself as a top OEM in the future.

During the previous quarter, SMART reported revenue of around $25 million. According to SanDisk, the initial impact of this acquisition is expected to marginally dilute its earnings, however, from 2014 onward, the acquisition is expected to turn accretive. According to the company's estimates, the acquisition of SMART will prop up its revenue by 25% from 2014.

Competitive Landscape

Earlier this year, Micron Technology successfully completed the acquisition of Elpida. Through this acquisition, the company expects to elevate its R&D and production operations, while controlling its cost structure through various synergies.

It must be noted that after completing this extensive acquisition, Micron Technology will be positioned right behind Samsung as the second-largest DRAM player with an estimated market share of around 28%.

Micron Technology also acquired 24% stake in Rexchip Electronics for $334 million. Post the acquisition, Micron Technology has gained a direct access to Elpida's 200mm DRAM fabrication unit located in Japan and 100% control of Akita Elpida memory.

Going forward, this acquisition should grant Micron Technology a complete freedom to switch its manufacturing facilities between its NAND and DRAM offerings, enabling it to suitably adjust to any changes in demand.

Seagate Technology also competes with SanDisk. In spite of a major decline in the PC and Notebook market, Seagate's stock price has appreciated during the past year. The growth is primarily underpinned by an escalating demand for storage capacity by large and medium enterprises.

As per IDC, demand for Notebooks slumped 10% during the previous quarter, predominantly due to the growing popularity of tablets coupled with an uncertain macro economic environment leading to spending cuts on IT from large enterprises. Nevertheless, PC sales are expected to exhibit a slight improvement during the next two quarters, as the economic environment is expected to stabilize, resulting in higher enterprise spending.

During the past three years, the overall HDD industry has witnessed a large consolidation with Seagate Technology acquiring Samsung's HDD business and several other acquisitions. It should be noted, from 2010 to 2012, Seagate's market share experienced a 13% jump, however, after the acquisition of Hitachi GST by Western Digital during 2012, Seagate's growth rate has marginally dropped. Analyst estimates suggest that the company will resume its growth once again from 2014 onward.

Potential Investors: Consider This

Other than the strategic acquisitions made by SanDisk, which will enable it to have a distinct competitive advantage moving ahead, investors should note that SanDisk presently trades at a PEG ratio of 0.49 compared to the industry average of 1.36. Similarly, its current PE ratio of 12.24 is lower than the industry average of 14.17.

The stock certainly seems to be trading at a discount considering that during the course of next five years, analysts expect SanDisk to grow at around 25% compared to the industry average of 16.2%. Investors with a long-term investment horizon should consider buying SanDisk.


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