SanDisk’s (SNDK) stock has taken a hit over the past month, falling more than 10% from $45 to $40 levels currently. This downward movement has widened the gap between the market price and our $50 price estimate, undermining our valuation by approximately 25%.
In our opinion, the decline in the market price is unwarranted since SanDisk is well-positioned to supply the smartphone and solid state drive (SSD) markets, both of which are expected to grow rapidly over our forecast period. Additionally, the stabilization in NAND prices, whose fall caused a year-over-year revenue decline for SanDisk during the last few quarters, will help the company grow its top-line going forward.
While SanDisk has struggled to post year-over-year growth during this calendar year, we think it is still in a strong position to deliver revenue growth in the coming years. What we found encouraging during the company’s recent quarterly results was that it posted a 23% increase in revenue on a sequential basis, creating a strong foundation for an increase going forward.
Smartphone Market to Grow Rapidly
Overall, we think that growth in the number of smartphones sold will be key for SanDisk. Gartner estimates that smartphone shipments grew at a rapid 46% year-over-year during the third quarter, maintaining a long run of rapid growth which is likely to continue over the next few years.
What is especially encouraging is that SanDisk was able to increase its market share during the year despite operating in the highly competitive mobile flash storage industry. We think a strong brand name will help the company maintain and increase its market share in the next few years, setting it up to get a bigger share of the growing smartphone flash storage market.
It is, however, worth noting that smartphone sales depend on a stable macroeconomic environment. Many emerging economies don’t have a two-year upgrade cycles as in the US, and if these economies slow, we could see a decline in overall smartphone sales.
Flash Prices Stabilizing
One of the key reasons that SanDisk is struggling to maintain year-over-year revenue growth is oversupply of NAND flash memory, which has heavily impacted the firm’s top-line. However, these trends seem to be changing as recent data from SanDisk and overall industry supply cuts indicate that NAND prices are stabilizing.
For example, SanDisk reported a sequential flash price decline of only 8% in Q3 compared to almost 20% in Q2. We think that these trends could continue and create upside to the Trefis price estimate. We currently expect the average selling price (ASP) per gigabyte (GB) of flash memory will fall rapidly to $0.01 by the end of our forecast period (from $0.50 now), but if flash memory prices fall only to $0.03 by 2019, we would see upside of 10% to the Trefis price estimate. You can use our tool below to assess the impact of a change in ASP per GB of flash storage on SanDisk’s value.
Another key point is that SanDisk’s NAND price declines were relatively muted compared with competitor Micron (NASDAQ:MU). This is encouraging since it indicates that the company’s management has done a good job in minimizing the effect of NAND price declines. The high quality management is likely to give SanDisk a competitive edge as it fights to maintain its large presence in the flash industry.
SSDs to Drive Growth
While the average selling price per gigabyte for SSD is much higher than that for a traditional hard drive, the drives are cheaper to run, use less power, are more reliable and compact. SSDs have another advantage in that they can process information faster and manage more operations per second compared to legacy drives. In our opinion, these factors will result in a higher demand for SSDs (especially since ASPs fall over the long term) as more enterprises shift to flash storage with cloud-based applications becoming more data-intensive.
We currently have a $50 price estimate for SanDisk, which is approximately 25% above the current market price.