SanDisk (SNDK), one of the leading NAND flash memory makers, will gain from the recent price increase of multilevel cell, or MLC, NAND flash memory witnessed in the first half of October. The trend will continue until November, as the demand will peak during the holiday season.
While releasing its third-quarter results yesterday, the company indicated that it has benefited from the retail business and gained market share from all geographies in the world. Although the company's gross margin and operating margin slipped year over year, it has gained sequentially due to higher price realization. This has resulted in EPS topping estimates by 15 cents, or 45.5%, at 48 cents. Similarly, revenues of $1.27 billion came in above analysts' expectations of $1.22 billion.
Revenues in $ Million
GAAP Gross Margin
Non-GAAP Gross Margin
Non-GAAP Operating Margin
Figures taken from SanDisk.
The above table indicates the pricing pressure during the first two quarters. Even in the third quarter, gross margin is yet to reach the first-quarter level. However, the sequential improvement in margin has allowed SanDisk to expect a slightly higher gross margin of 33% in the fourth quarter. The company is expecting revenue of $1.5 billion for the fourth quarter. However, analysts seem to think that the revenue outlook is conservative and that SanDisk can see much more demand from the iPhone as well as future products, such as Apple's (AAPL) iPad Mini and the Surface tablets from Microsoft (MSFT). Analysts predict revenue of $1.5 billion.
After Toshiba and Samsung cut their NAND flash memory production, prices have stabilized initially and then advanced in September. In October, MLC NAND flash price has witnessed an increase of 3%-17%, according to DRAMeXchange. As the replenishment preparation work begins, OEM orders from the makers of smartphone, ultrabook, and tablet PC clients would be concentrated around September. This will make NAND flash vendors prioritize and allocate capacity for system products, for which the demand is higher.
Industry observers attribute the increase in NAND flash price to clients preferring to restock inventory in September and October as a sequel to the spate of new product launches. This trend will remain in place until the middle of November. Thereafter, pricing could face pressure and could possibly see a downside for a while, TrendForce predicts. Any further increase in NAND flash depends on how the market reacts to the upcoming launches of Microsoft's Surface tablet PC and sale trends of the smartphones during the Christmas holiday season. Aside from this, the extent of replenishment demand before the Chinese New Year holiday would also dictate the pricing trend to follow.
Meanwhile, S&P Capital IQ equity analyst Angelo Zino commented:
We raise our 2012 operating EPS estimate $0.07 to $1.92 but keep 2013's at $3.39 and 2014's at $4.07. We maintain our 12-month target price at $55, on a blend of P/E and price-to-sales within peer and historical ranges. We expect more favorable prices as NAND supply constraints persist through the first half of 2013. We think new product developments efforts will lead to a more favorable mix as well.
Interestingly, revenues from the flash memory are estimated to fall 4.5% to $24.3 billion in 2012, from $25.5 billion in the last year, due to weakness that prevailed until July. However, the market will come back to growth trajectory in 2013 with 11.4% estimated growth, according to IHS. It will continue to expand to reach $33.3 billion by 2016. This is a 5.3% compound annual growth rate.
While there are some headwinds -- such as smartphone sales and tablet PC performance -- that will dictate the NAND flash market, the current conditions favor SanDisk to deliver favorable results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.