SanDisk's Jump Is Justified On Growth Outlook For Solid State Drives

| About: Western Digital (WDC)

Quick Take

  • SanDisk’s stock has risen over 15% in 2013 on a solid Q4 2012 earnings announcement.
  • We think this rise is justified because the company has ample growth opportunities in its solid state drive division, which makes up 15% of its value.
  • SanDisk has extensive ties with leading PC manufacturers which will help it grow its market share to 10% by the end of our forecast period.
  • If SanDisk is able to capture 20% of the SSD market by 2019, we would see approximately 20% upside to our price estimate.

SanDisk’s (SNDK) stock has risen over 10% during 2013 so far primarily on the encouraging results it posted for Q4 2012. We think that the stock’s ascent is justified primarily due to the growth posted in the solid state drive (SSD) division, which makes up approximately 15% of the firm’s value. This division will be a key factor for future growth because SanDisk’s relationships with industry leading original equipment manufacturers (OEMs), anticipated reduction in SSD prices and impact of cloud storage on enterprise SSD sales will ensure that its SSD revenues grow at a rapid pace in the coming years.

See our complete analysis of SanDisk here

SSDs Estimated to Be 25% of Revenues by 2014

According to the company’s management, SanDisk’s SSD sales made up approximately 10% of its total revenues in 2012. Revenues more than doubled to $458 million in 2012 from approximately $198 million in 2011. Additionally, management forecasts that SSDs will make up approximately 25% of the company’s total revenues by 2014.

Overall, we are encouraged to see that SanDisk was able to capitalize on a secular industry trend by more than doubling its SSD revenues. The company supplies SSDs to 10 leading PC OEMs, which should help it gain market share. We estimate that SanDisk’s market share in SSDs was approximately 4% in 2012, and we expect this figure to increase to approximately 10% by the end of our forecast period. If these OEM relationships help SanDisk increase its market share to 20%, we would see almost 20% upside to our price estimate for SanDisk.

Technology Improvements to Reduce Costs

One of the key factors holding back the wide adoption of SSDs is its high costs relative to regular hard disk drives (HDD). On average, SSDs are at least twice as expensive as regular HDDs and this cost differential is still causing price conscious customers and enterprises to prefer HDDs to SSDs.

However, as memory production costs go down due to an improvement in technology, these savings will be passed on to the customers. Consequently, this will lead to a decline in the average selling price per gigabyte for SSDs, eventually minimizing cost savings that customers generate by preferring HDDs over SSDs.

Cloud Storage Risk Overestimated

One concern however is the impact that cloud storage will have on SanDisk’s SSD business given that cloud storage will reduce the need for local storage solutions. While this risk is pertinent to SanDisk’s PC SSD business, we think the overall impact on SSD revenues will be minimal.

If cloud storage becomes the primary mode of storage for customers, the need for storage will shift from local PC/tablet/mobile to cloud servers. The key point is that regardless of where the data is stored, the need to store data will always exist. In fact, we think that the adoption of cloud storage will help SanDisk’s enterprise SSD business (the biggest of its SSD revenue streams) and believe that revenues for this division will increase from $252 million at present to over $750 million in the coming years three years.

We currently have a $50 price estimate for SanDisk, which is approximately the same as the current market price.

Disclosure: No positions