SanDisk (SNDK) designs, develops, and manufactures diversified data storage products using flash memory, controller, firmware, and software technologies. Its products include SSDs, embedded products, removable cards, universal serial bus (USB, drives), wireless media drives, digital media players, and wafers and components. Its embedded flash products are used in mobile phones, tablets, computing platforms, imaging devices, and many other products. In addition, its removable cards are used in a wide range of consumer electronics devices such as mobile phones, tablets, digital cameras, gaming devices and PCs.
The company operates in an industry characterized by rapid technology transitions and evolving end-user markets for NAND flash. With the emergence of mobile products including smartphones, tablets and other mobile devices, company's sales of embedded and removable NAND flash solutions for the mobile market grew to represent the largest percentage of its revenue, and it continues to see growth in smartphone and tablet adoption as well as in the average capacity of its embedded and removable products used in these mobile products.
Over the past two years the company has seen significant growth in its client SSD and enterprise SSD solutions and I believe that over the next few years the largest growth areas for NAND flash will be SSD solutions in the client computing and enterprise data center markets.
SanDisk's success is mainly attributable to strong client and enterprise SSD sales, strength in retail businesses, and favorable supply demand metrics. This is the reason why the company's total revenues for fiscal year 2013 of $6.17 billion increased 22% from $5.05 billion in fiscal year 2012. The increase in fiscal year 2013's revenues reflected an increase in the number of gigabytes sold with no change in the average selling price per gigabyte.
Source: Annual Report 2013
A Y/Y 22% increase in commercial revenue was primarily related to increased sales of client and enterprise SSD products and embedded memory products for mobile devices. Similarly, a Y/Y 23% increase in retail revenue was primarily related to increased sales of cards for mobile devices, USB drives, and SSDs.
Gross margin increased in fiscal year 2013 to a record high of 46.5%, compared to 33.3% in fiscal year 2012 primarily due to a favorable industry supply and demand environment coupled with a higher product mix of enterprise SSD products and high-performance retail products. These factors led to no year-over-year change in its average selling price per gigabyte, while its cost per gigabyte declined by 20%. Cost declines in fiscal year 2013 were derived from its increased mix of 19 nanometer wafers, lower depreciation costs for fab equipment, and weakening of the Japanese yen compared to the U.S. dollar. Net income for fiscal year 2013 was $1.27 billion or $5.31 per diluted share compared to $582 million or $2.38 per diluted share in fiscal year 2012.
The company has a strong portfolio of patents that help it to stay competitive in such a diverse and highly competitive market. As of the end of fiscal year 2013 the company had rights to more than 2,600 U.S. patents and more than 2,100 foreign patents. In addition, the company had more than 1,100 patent applications pending in the U.S. and had foreign counterparts pending on many of the applications in multiple jurisdictions.
The company also has patent license agreements with many companies including SK Hynix Semiconductor (OTC:HXSCL), Intel Corporation (NASDAQ:INTC), Hitachi Ltd. (OTCPK:HTHIY), Renesas Electronics Corporation (NYSEMKT:NEN), Samsung (OTC:SSNLF), Sony Corporation (NYSE:SNE) and Toshiba (OTCPK:TOSBF). In the three years ended December 29 2013, the company has generated $1.13 billion in revenues from license and royalty agreements.
Mobile products account for almost half of SanDisk's overall revenues and Apple is one of the primary drivers of revenue in this segment. According to Fool contributor Adam Levy, Apple accounted for around one fourth of SanDisk's revenue in the third quarter of 2013. SanDisk supplied flash memory for the iPhone 5 and it looks like it has gained further ground with the latest iPhones as evident in the bump in revenue and earnings. Many analysts, including Brain Marshall are very optimistic regarding the upcoming model of Apple (NASDAQ:AAPL) iPhone 6. This upcoming revolutionary product could boost SanDisk's prospects. Brain Marshall believes that new iPhone 6 could add over $3 in EPS in the second half of 2014. He also believes that the iPhone 6 will be launched as 2 new models this year, one with a 4.7" screen and the other with a 5.5" screen. The company's strong standing with Apple makes it well-positioned to gain from the next iPhone(s) later this year. Moreover, Apple's China Mobile (NYSE:CHL) deal can provide a further push to the company as analysts expect this venture to help Apple add around 15 million to 30 million units this year.
The company closed out last year with record-high revenue and the enterprise SSD segment enjoyed a dramatic expansion. The fourth quarter last year was a particularly strong period for computer-related SSDs with shipments of around 12 million units that increased year-end revenues to $6.8 billion. By 2017, PC SSD industry revenue of $22.6 billion will come close to narrowing the gap with PC HDD revenue of $23.5 billion. The SSD space includes the cache SSD segment where NAND flash is used alongside a hard disk drive as well as a separate segment in which NAND flash is embedded on top of an HDD in an integrated and hybrid form factor.
According to the company's fourth quarter and fiscal year 2013 results, SSD product revenue set another quarterly record and represented 19% of its annual revenue. I believe that the increasing growth in SSD will substantially increase the company's revenues along with its market share.
Source: Annual Report 2013
According to Trendfocus, SanDisk's market share is currently at 16.8%, positioning it at second place after Samsung (31.3%). As mentioned above, overall SSD product revenues for 2013 was $6.8 billion and is expected to grow to $22.6 billion by the end of 2017. As per the given market share the company's SSD revenues for 2013 were $1.14 billion and quite similar to company's actual SSD revenues of $1.17 billion. I believe that the growth in SSD along with its strong bond with Apple will help the company to boost its market share. Moreover, an increase in overall SSD will also boost the company's SSD revenues. The table above shows the growth in overall SSD revenues will also increase the company's SSD revenues.
Looking at the company's currently shares outstanding 225.51 million shares company's current revenue per share of its SSD product seems quite substantial at 5.07 per share. Company's share repurchase program of $150 million is assumed constant for the forecasting period. If the industry grows as expected, along with its market share, the revenue per share will increase substantially over the years and will add substantial value to the company's bottom line as the company is heavily focused on reducing its costs.
As part of its efforts to continuously reduce the cost of NAND flash, the company is currently focused on transitioning its products to 19 nanometer and 1Ynanometer technologies and it plans to transition to 1Z nanometer technology beginning in late 2014 and throughout the 2015 time frame. Its 1Ynanometer and subsequent technology nodes have increased manufacturing equipment requirements and this has reduced the cost reduction benefits obtainable through these technologies compared with previous technology node transitions.
After recording strong revenue and EPS growth the company is heading towards strong earnings growth backed by SSD growth and the launch of the iPhone 6. The company benefits from its leading position within the accelerating transition from hard disk drives to solid state drives. Furthermore, SanDisk returns value to its shareholders by stock buyback and dividend payments. Besides that the company has 8.83% free cash flow yields with EBITDA poised to grow in 2014 allowing for substantial returns of capital to shareholders that will improve ROE going forward. I believe that SanDisk presents itself as an attractive opportunity for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.