We’re in an economy that could flatline for years to come. Now that Treasuries have had their run, how do you position for a return with any margin of safety? I’ve opted for the 10% solution: 90% cash with 10% exposure to stocks that are on the cusp of catching a next-generation wave that will gain momentum regardless of the economic trendline. SanDisk (SNDK) is one of those.
The famous author Clay Christensen has written a number of books about innovation and disruptive technologies that transform marketplaces. Interestingly, he has profiled waves of evolution in the hard disk drive (HDD) industry to illustrate his points. That’s about to happen again, but this time, the new winner is not going to be a smaller, cheaper hard disk drive that kills off the bigger, more expensive drive. The new winner is going to be a whole new technology, flash-powered solid state hard drives (SSDs) and SanDisk will be a leading player.
For years SanDisk has supplied flash for consumer devices. Exploding volumes for digital cameras and other devices has allowed the company to drive down pricing while expanding capacity and performance. But pricing in consumer markets is tough. Although SanDisk is a survivor, even before the recent collapse in demand, the company was struggling to drive down unit costs for consumer products at the same rate that prices were falling.
The wave of enterprise adoption of SSDs that is just now commencing is important to supplier P&Ls. Consumer markets allow vendors to deliver low cost volume pricing, but profits come from enterprise markets, because the enterprise finds it worthwhile to pay up for reliability, performance, and bells and whistles. As enterprise markets open up for SSD suppliers – those that will survive this downturn – profitability will expand.
Yesterday, Sun (JAVA) announced another enterprise solution built around flash-powered solid state storage, adding a blade and rack server solution to the storage solutions announced in November. The benefits of SSDs vs. HDDs for the enterprise are huge: double the performance, up to 65 times faster response times, up to eight times the throughput and up to 38% less power consumption. HDDs are the last remaining moving part in most storage and computer systems, making them inherently more prone to failure, higher energy consumption and performance bottlenecks (due to the latency involved in getting the head to move to the right disk sector).
Consequently, there is an enormous amount of data center complexity that arises out of software and hardware that has been layered on top of HDD based systems to overcome the limitations of HDDs. So, while SSDs are still more expensive byte for byte than HDDs, because they can reduce operational costs and simplify the enterprise, once they gain a foothold in the enterprise their use will spread rapidly. It is only a matter of time before the majority of the enterprise storage market will shift to solid state.
Disclosure: Author holds a long position in SNDK