SanDisk: Undervalued And Benefiting From Changing Preferences

Mar.18.14 | About: Western Digital (WDC)


The 16 times forward EPS value estimate is not taxing.

The increasing demand for mobile and SSDs should act as a tailwind.

The technicals are bullish and in a minor downtrend.

SanDisk Corporation (SNDK) reported strong 2013 results that were driven by sales of its embedded and SSD offerings. Revenue increased 22% in 2013 and is forecasted to increase 13.5% in 2014. The cost structure continued to improve on technological advancements as well as operating expenditure discipline.

Investors are likely to benefit from the firm's transition to 1Y and eventually to 1Z technology. Also, the increasing use of SSDs in client as well as server is likely to continue to act as a tailwind for SNDK. Apple Inc. (NASDAQ:AAPL) represents a substantial portion of SNDK's revenue and is likely to maintain a dominant position in mobile computing throughout 2014 and 2015. Consequently, the outlook for sales of iNAND (used in mobile devices) offerings is bullish.

Management has done a fantastic job of improving the company's cost structure, which increased the value estimate. Also, strong growth from a change in consumer preferences adds to confidence in the intrinsic value estimate. Thus, it is likely that SNDK will reach the $81 per share, or 16 times forward EPS, intrinsic value estimate.

Recent Developments

  1. SNDK filed a civil lawsuit against SK Hynix, Inc. (OTC:HXSCF) and a criminal lawsuit against a former employee; both lawsuits are related to trade secrets and intellectual property.
  2. SDNK was awarded $28.5M in damages for PNY's breach of a license agreement.
  3. The 128GB SanDisk Ultra microSDXC card, which retails for $199.99, is available at and; the 128GB memory card is designed to provide user's mobile devices with ample storage space.
  4. The iNAND Extreme is the first iNAND product to be built on SNDK's industry-leading 1Y process technology and will be generally available in the second quarter of 2014.

Business Summary

SanDisk Corporation is a global leader in flash storage solutions. SNDK sells chips to device makers of smartphones, cameras, and other mobile devices. Also, SNDK is increasingly using NAND chips in its own branded solid-state drives, which are sold directly to companies and consumers. While they remain significantly more expensive than mechanical hard drives, SSDs are gaining popularity in data centers and consumer laptops because of their increased efficiency.

The NAND industry is fragmented with several companies offering similar products. Some of the competitors in the industry are larger and have greater resources than SNDK. Overall, suppliers of NAND have limited pricing power. Also, the threat of substitute products should weigh on profitability, as consumers utilize cloud-computing solutions, which sometimes replace the need for in-device memory. Lastly, the demand for data storage solutions is increasing as businesses and consumers store an increasing quantity of data electronically.








Gross profit




Operating income




Net income




EPS basic




EPS diluted




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After increasing 22% in 2013, revenue is forecasted to increase 13.5% in 2014 on strong demand for SSDs and embedded solutions. Profitability margins are forecasted to increase in the current calendar year on cost reductions and a contribution from higher margin retail products. Diluted EPS is forecasted to grow 16.6% on a reduction of diluted shares and increased net income.

























Share repurchases





Dividend paid





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While cash flow from operations is expected to increase 12.7% in calendar 2014, free cash flow is forecasted to decline on higher capital expenditure. The decline of free cash flow will limit share repurchases during the calendar year, which are forecasted to decline. The dividend is forecasted to increase to $0.25 per share/quarter.





Ending financial leverage





Quick ratio










Effective interest rate





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The solvency position is solid and there was ample liquidity at the end of 2013. The effective cost of debt has been trending lower as SNDK increased debt-to-capital. While the financial leverage ratio is forecasted to increase at the end of 2014, the solvency position is forecasted to remain solid.

Embedded and SSD sales are expected to drive revenue growth in fiscal 2014. The expectation is for continued strength in client and enterprise SSD as well as continued demand for iNAND and iNAND MCP on increasing global mobile device sales. The industry growth rate should keep ASPs per gigabyte relatively firm during the calendar year. Consequently, flat to slightly down ASPs times increasing units equals higher revenue, and the improving consolidated cost structure means margin expansion with EPS growing faster than sales. Additionally, share repurchases should at least offset dilution resulting in a higher share price.


  1. The share price is likely to remain volatile and investors could lose a portion or all of their investment.
  2. Investors should judge the suitability of an investment in SanDisk in light of their own unique circumstances.
  3. A decline the global economic growth rate and/or a decline in the pace of economic growth in the United States could adversely impact the results of operations and the share price.
  4. The technology industry is characterized by rapid technological change, which could materially adversely impact the results of operations.
  5. Competition in product development and pricing could adversely impact performance.
  6. Incorrect forecasts of customer demand could adversely impact the results of operations.
  7. Higher interest rates may reduce demand for SanDisk's offerings and negatively impact the results of operations and the share price.

This section does not discuss all risks related to an investment in SanDisk.

Portfolio & Valuation

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SNDK is in a bull market of primary and intermediate term degree. The shares are trading just off of the most recent high, which would be a dip to buy depending on the investment time horizon. Nonetheless, I expect traders to accumulate shares and SNDK to push towards $80 per share.

Expected Monthly Return

Expected Quarterly Return

Monthly Standard Deviation




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Intrinsic value estimates

Base case forward valuations



P/E: 16.06

Base case


P/S: 2.73



P/BV: 2.79

P/CFO: 9.09

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An average measure of profitability was used to determine the base case intrinsic value. The optimistic valuation implies that the more recent profitability is sustainable, and the pessimistic valuation implies a return to lower levels of profitability. The forecast is for above-average growth and above-average risk. The base case value is an 11% premium to the current market price, which is not too demanding, based on the forward multiplier model valuations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.