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SanDisk Corporation (SNDK), with a market cap of $13.48B, is a global leader in the NAND flash memory market. SanDisk designs, develops and manufactures data storage solutions in a range of form factors using its flash memory, controller and firmware technologies. SanDisk's management is expecting a healthy supply/demand balance this year and has raised its 2013 revenue target and given a forecast for June-quarter revenue that beat analysts' expectations. As reported by Bloomberg, SanDisk is limiting increases in output from its factories and expects enough demand to keep prices healthy this year.

Q1, 2013 Result

Strong SSD Growth

The highlights for Q1, 2013 was the revenue from SSD product, which grew over 200% on a year-over-year basis. Global retail channels also showed strength and produced 34% revenue growth as compare to the last year.

Increasing Retail Mix

As I described last quarter, the company is now reporting the channel mix of revenue as retail and commercial. The commercial channel includes OEM customers, B2B customers, direct enterprise customers and licensees. The total Q1 revenue was 62% commercial and 38% retail, reflecting a year-over-year mix shift toward retail of 6 percentage point driven by strong growth in that channel.

Increasing Margin

The non-GAAP gross margin increased from 39.9% in Q4 to 40.5% in Q1. The product gross margin remained about the same sequentially, with the license and royalty revenue driving the sequential increase in total gross margin. Both ASP per gigabyte and cost per gigabyte increased 2% sequentially, with the increase in both metrics driven largely by product mix.

Increasing Cash Position and Cash Flow

On the balance sheet, gross cash and marketable securities increased in Q1 by almost $500M to nearly $6.2B, bringing net cash to over $4.2B. The inventory balance decreased modestly in Q1 as the company is supply-constrained in several areas. Operating cash flow was $474M, highest Q1 record. $54M of repayments was received from the joint ventures while $48M was spent on the property and equipment during Q1.

Analysts' Call and Estimates

Analysts currently have a mean target price of $58.78 for SNDK, suggesting 5.49% upside potential based on the closing price of $55.72 as of April 17, 2013. Analysts, on average, are estimating an EPS of $3.84 with revenue of $5.63B, which is 11.40% higher than 2012. For 2014, analysts are projecting an EPS of $4.35 with revenue of $6.19B, which is 9.90% higher than 2013.

Fundamentally, SNDK's key stats will be compared to its peers in the industry of data storage, including Seagate Technology (STX) and Western Digital Corporation (WDC).

SanDisk

Seagate Technology

Western Digital Corporation

Industry Average

Market Cap

$13.48

$12.46B

$12.17B

N/A

Revenue Growth (3 Year Average)

12.3

15.1

18.7

5.9

Operating Margin, %, ttm

13.8%

21.1%

15.5%

12.0%

Net Margin, %, ttm

8.3%

19.8%

13.3%

8.9%

ROE, ttm

5.8

101.4

29.4

13.7

Debt/Equity

0.1

1.0

0.2

0.2

P/E

33.8

4.5

6.1

22.9

Source: Morningstar

Despite the lower revenue growth and margins comparing to hard-disk-drive manufacturing, SanDisk's SSDs are eating into HDD sales. Thus, SanDisk enjoys a much higher P/E as compared to STX and WDC. Further, a quick comparison will be reviewed between SNDK and Micron Technology (MU), a global manufacturer and marketer of DRAM, NAND Flash memory and other semiconductor components, as well as the averages for the industry of semiconductor memory.

SanDisk

Micron Technology

Industry Average

Market Cap

$13.48

$9.59B

N/A

Revenue Growth (3 Year Average)

12.3

19.7

10.9

Operating Margin, %, ttm

13.8%

-5.8%

12.0%

Net Margin, %, ttm

8.3%

-14.0%

4.3%

ROE, ttm

5.8

-13.9

4.2

Debt/Equity

0.1

0.5

0.2

P/E

33.8

-8.8

-9.0

Forward P/E

13.4

16.5

14.3 (S&P 500's average)

Source: Morningstar

SanDisk has achieved a much higher margins and ROE as compared to MU and the industry average. SanDisk also has a higher revenue growth as compared to the industry average. From the valuation perspective, SanDisk remains undervalued with its Forward P/E of 13.4, which is lower than MU and the industry average.

Technically, SNDK continues to be on the long-term uptrend since mid-November, 2012. However, in the near-term, SNDK is approaching its long-term uptrend support, as seen from the chart below.

(click to enlarge)
(Click to enlarge)

Source: Finviz.com

Bottom Line

SanDisk is playing smart and safe by controlling its output, thus to achieve a favorable market price. SNDK remains a solid holding as it continues to improve its balance sheet and increase its cash flow while successfully grow its SSD market and increase its retail channels. However, investors need to be aware that SNDK is still facing commodity like and cyclical natures of flash memory market. For bullish investors, a credit put option spread of July 20, 2013 $42/$45 put can be reviewed to gain some upside credit premium or to acquire SNDK shares at a price below $45 upon options expiration.

Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: SanDisk Is Playing Safe Even With Improved Fundamentals