Sandisk: The Next Apple?

| About: Western Digital (WDC)
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Who wouldn't want a piece of the next Apple (NASDAQ:AAPL)?! That's the buzz with Sandisk (SNDK). Skepticism seems an appropriate response to any hype like "the next Apple" but it looks like this company really could make a good run at such a feat.

Sandisk is already a big success in flash storage. Flash memory is used to store pictures, songs, and other data in consumer electronic devices such as digital cameras, MP3 players, phones, video games, and other portable media products. Sandisk isn't content with that role, however, and is aiming to take a leadership position in the next wave of portable consumer electronics including video and music players - taking direct aim at Apple, Microsoft (NASDAQ:MSFT), and many other heavyweights. That is a tall order, but such ambition is not misplaced at Sandisk.

There are plenty of differences that can never be repeated or even compared to Apple's unique rise, and fall, and rise again. It is one of the most amazing brand stories, and certainly Apple's evolution from computer to consumer electronics giant is unique. The iPod is an icon of the 21st century, propelling Apple's stock price up 3000% in the last nine years.

Sandisk believes there is a big opportunity to grab market share away from iPod with affordable alternatives like its Sansa music player, which already has an estimated 19% share. Last week the company made no secret of its intention to become a powerhouse in consumer electronics when it introduced its Sansa View, a music and video player with 4-inch screen and 8MB of flash storage capacity, allowing it to hold 33 hours of video or 2,000 songs. Sandisk says it is moving from a follower in music players to a market leader in mobile video and other next-generation consumer electronics.

Sandisk is also coming out with a Wi-Fi enabled MP3 player and, a little further on the horizon, USBTV which will ease portability of digital video from computer to television. That syncs well with the recent news from Netflix to distribute movies to computers via the Internet. Sandisk plans to price aggressively on its consumer products to speed the adoption of its new media players and products. The company can afford to sacrifice short-term profits for long-term market leadership and says it is confident that ultimately these products will be very profitable.

Most of Sandisk's current profits come from flash memory products. Flash is one of
the most popular forms of storage in digital cameras, MP3 players, video games, and increasingly phones. The video players add another element to the convergence in mobile electronics, and Sandisk is in position to fight with the big boys for this attractive prize.

Sandisk has blossomed since we first wrote about it in 1998, when you could buy the stock for a split-adjusted $2.25. Now it's at $43.46. Of course, a lot of the other numbers have grown since then, including earnings which have gone from 20 cents per share in 1999 to $2.00 in 2005 and an estimated $2.39 for the year that just ended. 2006 revenue is believed to have exceeded $3 billion and should top $4 billion in 2007. The market cap for Sandisk now stands at $8.55 billion.

This company has grown through acquisitions as well, swallowing up some other noteworthy names like M-Systems Flash and Matrix Semiconductor in the past year. Earnings growth is on a trajectory of 20% per year, according to analyst estimates. Pricing pressures have long been a concern in many segments of the chip business and flash is no exception, yet Sandisk has proven capable at staying ahead of the plunging cost/MB curve. The company owns its own manufacturing capacity and has managed those production assets well.

Sandisk has also established a fairly well-known brand name with its removable storage cards and other products. Moreover, the company has its products on the shelves of 200,000 stores worldwide, so distribution relationships are already in place.

It may sound like a leap to say that Sandisk could be the next powerhouse in portable consumer entertainment but this company has what it takes, starting from the inside out. It has an impressive foothold with lower priced iPod alternatives, cost advantages with its own manufacturing of flash storage, and an intriguing lineup of next-generation gadgets. The value of its retail distribution network is important, too. With $2.55 billion in cash and a booming flash storage business, Sandisk is a force to be reckoned with. Taking on the big boys like Apple and Microsoft carries big risk, but Sandisk is going after a big prize.

Disclosure: Author has no position in SNDK.