SanDisk -12.8% as Street debates supply, margins; Micron -3.9%


SanDisk's (NASDAQ:SNDK) soft Q2 gross margin and muted Q3 margin outlook stems from a "strategic decision" to supply Apple with a huge volume of embedded NAND flash and SSDs at lower margins, says Susquehanna. Susquehanna, RBC, and others are defending SanDisk's move, arguing the near-term pain is worth the long-term benefit of a strong relationship with Apple.

The company's below-consensus Q3 sales guidance is chalked up to supply constraints for 19nm NAND flash parts amid healthy demand from OEMs (likely including Apple) and enterprise SSD clients.

SanDisk stated on its CC (transcript) it now expects its 2014 bit supply growth to be at the low end of a prior 25%-35% guidance range due to the constraints. Industry supply growth is still expected to total 40%.

Needham (Buy) thinks SanDisk will ramp 19nm capacity in Q4, and expects a mix shift towards embedded NAND and SSDs to boost margins long-term. Morgan Stanley (Equal-Weight) isn't as enthusiastic. "We expected 14% Q/Q bit growth, 6% ASP declines, and 3% cost declines; instead they did 31% bit growth, 16% ASP declines, and 12% cost declines."

Micron (NASDAQ:MU) continues following SanDisk lower. Needham recommends buying on the weakness.

From other sites
Comments (26)
  • aardvark3
    , contributor
    Comments (653) | Send Message
     
    I'm adding to my position in MU on the weakness today. Good opportunity.
    17 Jul 2014, 01:58 PM Reply Like
  • Tai Yu
    , contributor
    Comments (1216) | Send Message
     
    I believe MU and SNDK are in the same industry while the former is the leader of the group. Whether or not SNDK is facing headwind may be subject to interpretation. Assuming a trickle down of SNDK's problem to MU is not likely to materialize.

     

    Trying to catch a falling knife may be too risky. I don't want to miss the opportunity either and I bought calls this morning. If I'm wrong, my exposure is limited and if I'm right the return will be leveraged.
    17 Jul 2014, 02:27 PM Reply Like
  • 20322211
    , contributor
    Comments (183) | Send Message
     
    Sandisk's margins should not be viewed as a headwind, especially when applied towards Micron.

     

    The key here is it was Sandisk's choice not to raise their NAND pricing. They could have but didn't because they wanted the Apple business.
    17 Jul 2014, 02:43 PM Reply Like
  • Retired Securities Attorney
    , contributor
    Comments (3995) | Send Message
     
    I'm not surprised that SanDisk investors did not predict lower margins. I am surprised that Micron investors did not either though. Micron has been saying it expects lower NAND ASPs in every analyst conference and in the two prior earnings conference calls. I believe that Micron wants lower NAND ASPs to make SSDs more competitive with HDDs so as to increase the attachment rate. The attachment rate is the term Micron uses to represent the percentage of computers sold with SSDs instead of HDDs. The higher that rate is, the more SSDs Micron sells. A small decrease in pricing which triggers a substantial increase in the attachment rate increases net income.

     

    Think of it like this. if I make candy bars and sell 10 of them at $1 and they cost me 50 cents to make, I've netted $5. If I lower the price to 90 cents and sell 20 of them at the lowered price, I make $8. Making $8 is better than making $5 so it is a good business decision to lower the price.

     

    I think Micron is pushing the prices down deliberately.
    17 Jul 2014, 04:27 PM Reply Like
  • 20322211
    , contributor
    Comments (183) | Send Message
     
    Also in Micron's favor is that with a large portion of sandisk's nand supply tied-up with apple, they are in a supply constraint situation.

     

    They couldn't make up for their margin shortfall by selling to others at higher prices if they wanted to.
    17 Jul 2014, 04:35 PM Reply Like
  • Jaret Wilson
    , contributor
    Comments (1193) | Send Message
     
    RSA: It's possible it's intentional by MU. The mx100 drives are definitely priced to move. I think whether they're trying to drive up industry attach rate or not, they are at least trying to drive up their own attach rate. They want to get that nice cheap 16nm MLC in something other than commodity memory cards.

     

    The beauty of the elasticity of NAND is that Micron can open up an all-you-can-eat trough of it and make a little extra profit and also get the industry moving in the right direction. Like I've said before, DRAM is the industry I like. NAND may be great in the future too, but it's going to have growing pains.

     

    In my opinion SNDK should have been flat to slightly down on the report, and MU should have been flat to slightly up (NAND pricing was mentioned as rising, and SNDK bit increases were said to be at the low end and below industry average, both positives for Micron).
    17 Jul 2014, 05:16 PM Reply Like
  • i_am_seeker_2
    , contributor
    Comments (1778) | Send Message
     
    I don't think that Micron has anything to do with it. ASPs aren't the same throughout the NAND universe, there isn't one price that is lowered or raised. Not even for, say, a 64Gb chip. Most NAND is sold as part of some other product, and product mix is crucial in determining what margins will be. Here is a comment from Sandisk's CC transcript, from Judy Bruner:

     

    The product mix of our sales impacted our blended price per gigabyte and cost per gigabyte, causing the movement in both statistics to be higher than the underlying like-for-like trends. For Q2, our blended price per gigabyte decline was 16% and our blended cost per gigabyte decline was 12%, whereas on a like-for-like basis both numbers were single-digit declines.

     

    Note the last sentence: "on a like-for-like basis both numbers were single-digit declines." Product mix makes a huge difference in what GM is reported and hence on what profit is reported.

     

    I am not going to try to find it right now, but in other parts of the CC, it became pretty clear that Sandisk made a strategic decision to sell some low margin product to Apple in order to keep other Apple business, which I suspect will show up at some point over the next couple of quarters. And they will beat estimates handily then, IMHO, as there will be some "make up" revenue from higher margin products (probably SSDs going into Macs). That last part is just a guess, and we won't really know until Q3 or Q4. We'll see.
    17 Jul 2014, 05:21 PM Reply Like
  • Jaret Wilson
    , contributor
    Comments (1193) | Send Message
     
    Agreed, it was definitely an intentional mix shift that lowered margins. The ~15% share price drop is strange to me.
    17 Jul 2014, 05:31 PM Reply Like
  • 20322211
    , contributor
    Comments (183) | Send Message
     
    HA! being an MU stock owner, you should be used to these haircuts! My heart doesn't even skip a beat anymore.

     

    Don't know if the SNDK owners are used to it though?

     

    On days like these, you do not want to be a company that hiccups on a quarterly report (AMD is currently enjoying a 17% haircut).
    17 Jul 2014, 05:37 PM Reply Like
  • i_am_seeker_2
    , contributor
    Comments (1778) | Send Message
     
    "Don't know if the SNDK owners are used to it though?"

     

    lol, you obviously haven't followed Sandisk over the years. It has been way more volatile than Micron since about 2002, after Micron's "glory years" were definitively ended.

     

    @Jaret--
    Traders love to make big moves in Sandisk--up and down. Expect the unexpected when you least expect it (so to speak, lol). And expect it x2.
    17 Jul 2014, 06:42 PM Reply Like
  • Skorcherbro
    , contributor
    Comment (1) | Send Message
     
    Me too. Still long MU. Although this dip will most likely wipe out most of my Jul 32 call gains in one day, I'm adding some more long (Oct) calls today.
    17 Jul 2014, 02:49 PM Reply Like
  • Tai Yu
    , contributor
    Comments (1216) | Send Message
     
    Using Michael Porter's 'Five Forces' model used in competitor analysis. We can see SNDK is relatively weak supplier in relation to a formidable buyer- AAPL. This could be a sign of weakness.

     

    There is always two sides to a coin no matter how thin we make it. If SNDK can hammer out a long term contract encompassing huge quantities, the apparent weakness may turn out to be blessing in disguise. Analysts may be obsessed with gross margin yet it is the product of the quantity and margin that determines the bottom line. Indeed, a steady business may encourage SNDK to improve net margin through volume leveraging.

     

    I would prefer MU as my investment in the chip sector. If worries about SNDK persists, investors may move more fund to MU. The related sector is hot and institution and the investment alike may like to stay on.
    17 Jul 2014, 03:13 PM Reply Like
  • Mark Humphrey
    , contributor
    Comments (931) | Send Message
     
    I seriously doubt that SNDK reduced selling prices and margins based solely on the desire to build goodwill with Apple. This pricing decision probably reflects concerns with broader market conditions for SNDKs products, that both SNDK and Apple see coming, rather than narrow concern with appeasing Apple.

     

    SNDK's broader market conditions are slowly deteriorating. I'm small short SNDK, but from somewhat lower prices than today's.
    17 Jul 2014, 03:28 PM Reply Like
  • Eric Jhonsa
    , contributor
    Comments (1276) | Send Message
     
    Apple is known for driving a hard bargain with its suppliers. A former engineer at one of the chip suppliers once told me the problem with selling to Apple is that "they want everything for free."

     

    A bit of an exaggeration, but it drives home the margin pressure Apple can produce.
    17 Jul 2014, 03:34 PM Reply Like
  • northern_bald_eagle
    , contributor
    Comments (61) | Send Message
     
    On the other hand Apple overcharge customers for everything. A lot of people are full of joy to be overcharged by Apple; most think that if cost them an arm and a leg then it must be worth it and they must be smarter than the ones who bargain for free like Apple do.
    17 Jul 2014, 06:45 PM Reply Like
  • Tai Yu
    , contributor
    Comments (1216) | Send Message
     
    The elec-semiconductor manufacturing group ranks 3rd among the 197 groups identified by IBD. If you have the expertise knowledge to identify a faulty ranking, shorting could be profitable. The downside of shorting is theoretical an unlimited loss nevertheless and extreme care is advisable.
    17 Jul 2014, 03:40 PM Reply Like
  • absarokeedave
    , contributor
    Comments (96) | Send Message
     
    Near term, I'll take MU with it's 2/3rds biz in DRAM and solid, if not rising, DRAM prices. Also looks like SNDK won't be swimming in excess NAND given the APPL contract. MU's SSD biz should gain some traction. SNDK still great company, sell off a bit over done too
    17 Jul 2014, 04:01 PM Reply Like
  • Tai Yu
    , contributor
    Comments (1216) | Send Message
     
    Hi Absarokedave,
    Did your expertise understanding of the industry give the confidence to load up more shares of MU in mid Apr?
    17 Jul 2014, 04:49 PM Reply Like
  • absarokeedave
    , contributor
    Comments (96) | Send Message
     
    My initial MU buy was Aug last year in mid 13's, then again in Jan 14 in 24 range. All held long. I have no "expertise" in this industry and what understanding I now have was obtained from much smarter people on the SA threads and those folks that are in the industry or retired from it. Just a humble guy trying to learn from others. I believe MU has greater upside going forward than SNDK in next 12 months
    18 Jul 2014, 12:39 PM Reply Like
  • alan kohn
    , contributor
    Comments (170) | Send Message
     
    there many differences between mu and sndk,but perhaps most important is that sndk is primarily a distributer of memory chips and mu is primarily a manufacturer of memory chips. the price of chips is a cost to sndk and revenue mu.
    18 Jul 2014, 02:19 PM Reply Like
  • i_am_seeker_2
    , contributor
    Comments (1778) | Send Message
     
    That is wrong, a common misconception. Sandisk manufactures NAND in the fab that they jointly operate with Toshiba. They don't just buy production from Toshiba, they operate a part of the fab that both companies own through a JV. They don't sell very much of their production as raw chips or wafers, they sell most of it as part of a finished product like SSDs (29% of sales in the most recent quarter), flash drives, embedded chips, flash cards, etc. They aim to sell as much of their production like that as possible.

     

    Micron aims to do the same with their NAND production, but they have not so far been as successful at it as Sandisk. Most of their production is DRAM however, and that is sold as chips.
    18 Jul 2014, 04:16 PM Reply Like
  • Tai Yu
    , contributor
    Comments (1216) | Send Message
     
    A jinx by pundits may push down a great stock and enables us to pick up at more attractive prices.

     

    In my opinion, getting to know the different but essential perspectives of a particular stock reinforces our belief an opportunity has arisen in the market. An example is BX, despite its great earning quarter after quarter, it dropped to $27.56 on may 7. An article that I read in seeking alpha tells me there is individual buying more more of BX at $28.6. BX has risen above its recent high today and is poised to break out from a very bullish 'cup and handle' pattern.

     

    Chairman Yellen's remark about the Internet company may present an opportunity to buy Facebook at a discount too.
    18 Jul 2014, 02:38 PM Reply Like
  • alan kohn
    , contributor
    Comments (170) | Send Message
     
    as far as I know sndk has not reported its percentage of its production of nand chips. please enlighten me. micron makes all of its product. when the cost of chips rises rapidly, sndk costs of materials rise accordingly since the chips are a significant cost of the finished product.
    18 Jul 2014, 06:01 PM Reply Like
  • i_am_seeker_2
    , contributor
    Comments (1778) | Send Message
     
    I have no idea what you mean when you say "as far as I know sndk has not reported its percentage of its production of nand chips. please enlighten me. micron makes all of its product."

     

    Sandisk makes all of its own NAND product as well. It is part of a JV with Toshiba. They operate 3 fabs together right now. Go read a 10Q.

     

    EDIT: Well, I take that back. Part of their L&R agreements with Hynix and Samsung includes a clause that gives them the option of buying NAND from the latter under certain conditions. They do that when they can't make enough of their own to fulfill their needs. But the vast majority of the NAND that they use comes from the JV with Toshiba. They also share R&D with Toshiba, although they both also have their own R&D teams. It is probably the most successful JV in technology history, as far as I know.

     

    Second Edit: But they do buy DRAM and controllers from outside parties. They make some of their own controllers, they design some others and have outside parties make them, and they also buy controllers from third parties. But unlike Micron they don't make any DRAM.
    18 Jul 2014, 07:16 PM Reply Like
  • William Tidwell
    , contributor
    Comments (1308) | Send Message
     
    Seeker,

     

    Good points. Also, according to their Q2 concall, less than 5% of their production is sold on the merchant market. They are, however, a buyer of merchant NAND as not all of their products use captive NAND.

     

    Regarding the Apple contract, SanDisk may be (informally, not seen on the income statement) allocating part of the discount to Apple to marketing expense. SanDisk believes it is making the best NAND product on the market in terms of quality and performance and because of that they offer the best value at the price they offer. All that being said, there is a fourth leg of this stool and that is the ability to deliver. With Samsung off the table, if you were in their shoes and were going to make a bet on a customer relationship over the next few years, who else would you want to partner with other than Apple? Mehrotra and is a strategist and this is an intermediate term marriage of convenience with Apple while SanDisk builds its Enterprise/Hyperscale dominance. Once that done, Apple will pay more or not but SanDisk won't need them anymore in any case.
    20 Jul 2014, 07:41 AM Reply Like
  • alan kohn
    , contributor
    Comments (170) | Send Message
     
    On their earnings conference call, management stated that they are supply- constrained and would be buying nand chips in the merchant market for several quarters. I was wondering what the implications of this would be for the company in a market where chip prices are rising.
    19 Jul 2014, 10:31 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Hub
ETF Screener: Search and filter by asset class, strategy, theme, performance, yield, and much more
ETF Performance: View ETF performance across key asset classes and investing themes
ETF Investing Guide: Learn how to build and manage a well-diversified, low cost ETF portfolio
ETF Selector: An explanation of how to select and use ETFs