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Flash memory maker SanDisk (NASDAQ:SNDK) has had a terrific year so far with shares up around 60%. Driven by increased adoption of solid-state drives ((SSDs)), embedded memory products, and the presence of key customers such as Apple (NASDAQ:AAPL), SanDisk's revenue and margins have improved considerably. The stock is now trading close to its 52-week high, but it hasn't run out of fuel yet.

Solid performance

It wasn't surprising when SanDisk posted terrific third-quarter numbers last month. Revenue and earnings topped consensus estimates, while outlook was impressive as well. SanDisk's revenue was up 28% from the year-ago period. Gross margin growth was even more impressive. SanDisk saw its non-GAAP gross margin improve to 50.1% in the quarter, a massive improvement from 31% in the year-ago quarter.

SanDisk was able to achieve robust growth as it saw higher sales of its higher margin products. The company was able to strengthen its position in client and enterprise SSDs (partly due to its acquisition of SMART Storage Systems), and it also bolstered its retail channel in both developed and emerging markets.

Solid moves

SanDisk's 19-nanometer client SSDs, which were rolled out recently, are also gaining traction and the product has gained qualification at all the major PC makers. Moreover, SanDisk's enterprise SSDs have now gained qualification at six of the top seven original equipment manufacturers ((OEMs)).

In addition, SanDisk is of the opinion that its acquisition of SMART Storage will help it scale up its enterprise SSD product architecture substantially. As such, management claims that SanDisk will be able to deliver more features, better performance, and greater reliability to its enterprise customers in the future.

SanDisk is expecting rapid growth in its SSD business. The company believes that it will be able to exceed its growth target from this segment this year, and make up 25% of overall revenue in the next fiscal year.

Great prospects

Mobile product sales, which account for almost half of SanDisk's revenue, have also been going strong. The company's iNAND embedded flash offering has gained traction at mid- and low-tier smartphone makers. This is an important market. For example, the sub-$200 smartphone market is growing at a rapid pace, and this led research firm IDC to increase its mobile phone shipment growth forecast for 2013 to 7.3% from 5.8% earlier.

Gartner is also of the opinion that mid-tier smartphones will be in good demand in mature markets while the low-end smartphones are gaining traction in the emerging markets. On the premium front, it is Apple that's aiding SanDisk's growth. According to Reuters, Apple accounted for 13% of SanDisk's revenue last year and was its biggest customer, and the launch of the latest iPhones acted as tailwinds.

Sales of the iPhone 5s have been strong and helped Apple become the top smartphone seller in the U.S. in September, according to Counterpoint Research (via The Guardian). According to the firm, Apple was able to sell 4.8 million phones in the U.S. in just 10 days of September, grabbing 38% share of the market. The iPhone 5s was the top-selling device, followed by Samsung's Galaxy S4, while the cheaper iPhone 5c occupied the third spot.

The momentum is expected to continue as Apple releases the devices in more countries. Apple recently rolled out the iPhone in 35 more countries across the globe. Also, it is being reported that sales of the iPhone 5c, which were slowing down earlier, are now catching up to the iPhone 5s. The 5c was being outsold by the premium 5s by a multiple of 3x in the U.S., as reported by Localytics. However, that ratio is now down to 1.9x, which bodes well for component suppliers.

Hence, higher sales of the iPhone should continue driving SanDisk's top line. But that's not all. SanDisk had started supplying SSDs to Apple for the retina MacBook Pro earlier this year, which means that the company has room apart from iPhones to grow its business at Apple.

Moving on, SanDisk expects that new technology trends will drive the need for storage. According to CEO Sanjay Mehrotra, "...the introduction of 4K and 120 frames per second video capability, increasing adoption of burst mode in mobile devices and recent offerings from content providers that drive more usage of local storage are trends which bode well for the average capacity increases in smartphones."

Potential risks

An investment in SanDisk is not without risks. However, according to Equity Dimensions, the growth of cloud storage technology could be a threat for SanDisk.

The cloud storage technology equips users and businesses with the flexibility of storing data and accessing it at their convenience. It is believed that cloud storage technology might pose a threat to the potential growth of flash memory consumption. In addition, the expected growth of 20%-25% in flash memory, according to Equity Dimensions, is lower than the historical growth rate as a result of cloud storage services such as iCloud and Dropbox.

The growth in these services could hurt flash memory consumption in the future. But a potential upside might come in the form of higher sales of solid-state drives which are finding use in cloud storage.

Conclusion

Thus, SanDisk seems pretty well-positioned to benefit from growth in storage and mobile computing.

Moreover, despite its good run up this year, the stock is still not expensive. Its trailing P/E ratio of 18 is slightly below the industry average, while a forward P/E of just below 12 indicates that earnings growth is expected in the future. Also, the fact that SanDisk sports a dividend yield of 1.30% is an added attraction. Finally, given the company's prospects, one can count on the stock to reach new highs going forward.

Source: SanDisk: A Cheap Way To Benefit From The Mobile Revolution