In the PC and server industry, hard disk drives from Seagate (STX) and Western Digital (WDC) still offer the most storage space per dollar. However, as NAND flash prices continue to drop, solid state drives will see continued adoption across the entire compute spectrum, from laptops to the data-center.
On the consumer side, some believe that in terms of processing power, mainstream laptops and desktops have reached the point of being "good enough". In fact, Advanced Micro Devices' (AMD) CEO, Rory Read, notes that "there's enough processing power on every laptop on the planet today".
However, this processing power is still severely held back by the 5400RPM and 7200RPM hard disk drives that ship with most PCs today. In addition to significant speed improvements, solid state drives consume less power than their hard disk counterparts, which for laptops is important to preserving battery life.
For more high end applications such as severs and cloud infrastructure, the need for faster storage is easy to see. As more users rely on the cloud to store their data, the faster the storage systems will need to be to accommodate large number of simultaneous accesses.
So to take advantage of this booming industry, which will see a projected 51% CAGR from 2010 to 2015, the following stocks seem to offer an incredible value at levels significantly off of their 52 week highs:
1. SanDisk (SNDK) manufacturers a wide variety of flash memory products, from USB flash drives to high performance solid state drives. SanDisk recently acquired Pliant, an enterprise SSD manufacturer, to expand into the higher margin enterprise segment. In addition, SanDisk has a strong OEM presence, having recently scored design wins with Lenovo and Fujitsu. The company is trading near the bottom of its 52 week range at $33.41 as of last close. With a trailing P/E of 9.33, it seems undervalued here, especially with the large opportunity that flash products -- and in particular, solid state drives -- present.
2. Micron (MU), traditionally known for its DRAM operation, is also a strong player in the NAND flash and solid state drive business. Micron, too, builds its own flash and is the majority stakeholder in the Intel-Micron Flash Technologies joint manufacturing venture with Intel (INTC). Micron designs and sells both consumer level solid state drives as well as enterprise solutions. It also supplies NAND flash to a number of other SSD manufacturers.
Micron is trading in the middle of its 52 week range at $5.59 as of last close. I think the company is undervalued here, trading significantly below its book value of $8.07/share. However profitability has been an issue for the company as of late, especially as DRAM and NAND prices continue to fall. Consolidation of the DRAM industry with the bankruptcy of Elpida, however, could prove to be a significant boon for the stock.
3. OCZ Technology Group (OCZ) is a fabless, pure-play SSD manufacturer. The company has a strong and growing presence in both the consumer and the enterprise side of the SSD business, with an emphasis on the enterprise side of things. The company is trading near its 52 week low with the most recent close at $4.41. With a projected 80% growth at the midpoint of the current fiscal year's guidance and with gross margins steadily improving each quarter, the stock seems to be a bargain as it is currently trading at less than 1x sales. With the company is becoming more vertically integrated thanks to its acquisitions of Indilinx, engineers and IP from PLX, and SANRAD, which should improve margins and profitability.
The key concern for this company has been its lack of profitability, so it will be key to see if they post a Non-GAAP profit in the second quarter of Fiscal 2013 as stated in the most recent conference call. It will also be imperative to watch to see if the company hits its revenue guidance.
4. LSI Corporation (LSI) is a semiconductor, systems, and software provider. They recently acquired the SSD controller designer, SandForce, whose controllers are very widely used in many SSD designs today, including (but certainly not limited to) those from Intel and OCZ, as well as LSI's own PCI-E enterprise drives. The company itself has a strong balance sheet ($623M in cash, no debt), and excellent quarterly earnings growth (640% yoy) and revenue growth (31% yoy). In addition, the company has been buying back shares, which should create additional shareholder value. The stock is in the middle of its 52 week trading range, last closing at $6.51.
Other companies with strong SSD presence are Intel and Corsair Components (CRSR). But the SSD industry is such a small part of Intel's top and bottom lines that I would not expect the solid state expansion to have as significant an effect on them as it would for the aforementioned companies.
In short, solid state storage is the future, and I believe that as the industry grows, the share prices of the mentioned stocks will follow suit.
Additional disclosure: I may initiate long positions in MU and LSI in the next 72 hours.