Mobile Memory Sales Boost SanDisk

Jul.26.10 | About: Western Digital (WDC)

SanDisk Corporation (SNDK) is a global leader in the flash memory card market. Major competitors include Hynix, Micron (NASDAQ:MU), Samsung (OTC:SSNLF), STMicroelectronics (NYSE:STM), Toshiba (OTCPK:TOSBF) and IM Flash (a joint venture of Micron and Intel (NASDAQ:INTC)).

SanDisk is currently experiencing torrid demand from manufacturers of smartphones, tablets, e-book readers and other mobile Internet devices. The company reported revenue of $1.18 billion for the second quarter of 2010, up 61% year-on-year. SanDisk also maintained excellent gross margins thanks to strong memory pricing and successful cost-cutting efforts.

In response to this news we have increased our stock price estimate for SanDisk from $43.70 to $50.2. Our analysis follows below.

OEM Business to Drive Growth for SanDisk

Sandisk sells memory cards to a number of original equipment manufacturers (OEMs). The OEM business grew 181% from the year-ago quarter ,with unit volume more than doubling during the same period. The OEM business is expected to remain strong for the rest of the year, driven by new product cycles from manufacturers of smartphones, tablets, e-book readers and other mobile Internet devices that use flash-based storage solutions.

SanDisk expects strong demand for memory cards from manufacturers of tablet devices that compete with Apple’s (NASDAQ:AAPL) iPad. The company also announced a joint venture with Toshiba to manufacture flash memory at Fab 5, a new facility at Toshiba’s memory production facility in Mie Prefecture, Japan.

We estimate that memory cards for mobile phones constitute approximately 43% of SanDisk’s share value. Sandisk sells mobile memory cards to both OEMs and retail customers. Retail demand has been particularly strong in Asian markets and seems likely to remain brisk for the rest of 2010.

We expect SanDisk’s share of the global mobile phone flash memory market to reach 32.5% by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own mobile memory market share estimate and see its impact on SanDisk’s stock price.

High Gross Margins

SanDisk reported strong margins for the second quarter, driven by favorable pricing and internal cost-cutting efforts. Consolidated product gross margins stood at 41.8% for the six months ending in July 2010, up 20.7% year-on-year. SanDisk expects demand to exceed supply for the second half of this year. Accordingly, we forecast gross margins of 39.1% for for 2010.

The chart below shows how SanDisk’s gross margins impact its stock price. You can drag the trend-line to create your own margin estimate.

Disclosure: No positions