SanDisk A Buy With $10 Upside

| About: Western Digital (WDC)

As we move slowly towards the fourth quarter of 2012, technology consumption trends are changing at a fast pace, and leading technology companies are competing neck to neck to offer the coolest smartphone, the best HDTV, lightest laptop, the fastest microchip and the smallest hybrid disk drive. Amidst all this chaos, the technology sector continues to outperform many other sectors, as consumers continue to spend on devices in spite of the sad state of economy. Sandisk Corp (SNDK) is poised to benefit greatly as more and more portable devices are used.

Sector Coverage

In the past few months, I have covered Seagate (NASDAQ:STX) and Western Digital (NYSE:WDC) closely - both big players in the Hard Disk Drives (or HDDs) market.

These articles mainly addressed the Hard Disk Drives (or HDDs) market. There is a great opportunity for investors in the same industry of Computer Data Storage, but a much different technology - Solid State Drives (or SSDs). Among all the companies in the SSDs business, SanDisk appears to have the best bang for the buck. Let us discuss why.

HDDs vs. SDDs in layman terms

Introduced in 1956 by IBM, HDDs have always been the ultimate storage option for personal computers and enterprise servers. HDDs have data stored on a "platter" that spins, and a mechanical movement of the read/write head is required to read or write data that is stored at a specific location on the platter. HDDs are mainly used when a lot of storage capacity is required (mostly over 500 GB), disk size does not matter, and of course where cost matters (HDD costs about $0.10 per Gigabyte) more than an ultra-fast performance.

In an SSD, data gets stored in microchips, and accessing the data does not require mechanical movement of the read/write head. This makes the SSD faster in performance and smaller in size. Cost wise, SSD is 15 times more costly than the HDD, at $1.50 per Gigabyte. There are other advantages of SSD over HDD - like not being affected by interfering magnetism, lesser noise and vibration, and lesser power draw which results in higher battery life - some very important factors for portable devices.


SSDs have completely taken over the tablets and are gaining traction in the portable computers space (ultrabooks use SSDs). One must note that SSDs need major technological advances to match HDDs' low cost and high capacity parameters, and until that happens, demand for HDDs especially in the personal computers and enterprise servers space will continue to thrive. HDDs continue to sell at high prices in the near term, thanks to supply disruptions caused by Thailand floods and global demand for computer storage. Nevertheless, companies that are entirely or heavily dependent on earnings from HDD sales should rethink their strategy and product portfolios. Solid State Drives (or SSDs) will eventually start posing a bigger threat than it does today to the demand of HDDs.

SanDisk's Fundamentals

SanDisk's products are used in a much wider range of electronic products, such as digital cameras, smart phones, laptops, MP3 players and gaming consoles.

  • The company is knee deep in researching SSD applications for laptop computers and even PCs, and will pose a huge threat to the HDD market in the future. The continued emergence of smartphone, tablet and ultrabook markets will see increased revenues for SanDisk.
  • SanDisk reported Q2 Earnings of $0.21 per share, beating the Wall Street consensus of $0.184 on July 19 2012. The next expected report date is October 22 2012. The EPS estimates for the next two years for this companies shows a solid growth trend, as seen in the chart below. Essentially, SanDisk's stock appreciation story is all about revenue growth in 2H 2012, especially 2H 2013 and 2014.

    EPS Growth trend in 2013, 2014

  • Applying a modest 14 times multiple to the company's 2014 estimates, we get a price target of $57.


From a fifty thousand feet view, the data storage industry will remain a thriving market for the next few years because of increased use of digitization, e-recordkeeping, cloud computing and Big Data analytics that is used for business intelligence.

Investors should make hay of this opportunity by selecting companies with higher growth estimates for the next many quarters, and especially with a strategy that aligns with the technology and business trends in the market.

Comparing the available stock alternatives in the SSD market, SanDisk stands out like a diamond in the rough.


The biggest risk to Sandisk's further appreciation is greatly reduced consumer spending due to economic conditions. Also, the computer storage industry remains highly competitive and often market consolidations result in price compression, which in turn reduce the company's margins. SSD continues to advance technologically, the prices cannot remain this high all the time. Investors must understand these risks before initiating long positions.

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.