What Drove SanDisk’s Rally In 2014?

SanDisk Corporation (NASDAQ:SNDK) had a good year on the back of a robust performance from its solid state drive (SSD) storage division. In the first three quarters of 2014, SSD revenues grew by 65% over the prior year period to $1.4 billion. The company witnessed weak demand for non-SSD embedded storage products in the first half of the year, but the trend reversed as demand for custom embedded storage picked up in Q3. Despite the increase in demand for custom embedded storage products in Q3, the division as a whole saw revenues decline by over 15% in the first three quarters compared to the year-ago period at just over $1 billion. Growing SSD product sales and the profitability of these storage products helped SanDisk’s stock to rise by nearly 50% since the beginning of the year. Below we take a look at SanDisk’s three largest segments by revenue, our forecasts for these divisions and the trends driving growth.

We have a $93 price estimate for SanDisk’s stock, which is slightly lower than the current market price.

See our complete analysis of SanDisk here

Solid State Drives And Enterprise Storage

SanDisk’s SSD revenues include consolidated revenues generated by SSD sales for both the enterprise and consumer markets. Enterprise SSDs consist of high-end enterprise-class SSDs used mostly in data centers, while client SSDs include embedded/internal SSD storage in tablets, smartphones and computers. According to our estimates, the Solid State Drive segment is SanDisk’s most valuable division, making up over 36% of the company’s net value. This has also been the fastest growing segment within the company, with year-to-date revenues nearly 65% higher than the year-ago period at $1.4 billion. ^[1] In addition to fueling SanDisk’s top line growth, this division also adds to the company’s overall profitability as SSDs are high-margin products. The industry-wide transition from traditional hard drive storage to solid state drives led to strong demand for SanDisk’s product offerings, especially for enterprise-grade products. As a result, SanDisk’s management mentioned in its Q3 earnings that the company is now in a position to generate $1 billion in revenues from enterprise SSD sales in 2015 – one year ahead of schedule. ^[2]

Furthermore, SanDisk acquired PCIe connected SSD supplier Fusion-io for $1.1 billion in June to bolster its enterprise SSD offerings. Management expects the acquisition to start being accretive to its earnings from mid-2015, which should help SanDisk overtake its nearest rivals in the enterprise SSD market. With PCIe flash storage under its belt, management believes that the company now has the “broadest portfolio of enterprise and consumer flash solutions” in the storage industry. As a result, we forecast SanDisk’s share in the enterprise market to jump from 10.8% in 2014 to over 13% in 2015.

Embedded Storage And Key Growth Drivers

SanDisk is one of the largest global manufacturers of NAND flash products, which are used as embedded storage in smartphones, tablets and other consumer electronic devices. The embedded storage segment makes up approximately 12% of SanDisk’s value, according to our estimates. Embedded storage products (not including embedded solid-state drives) generated more than a quarter of SanDisk’s overall revenues of $6.2 billion in 2013. The contribution of embedded storage has declined to about 20% this year, with year-to-date revenues generated by embedded storage declining by almost 15% y-o-y to just over $1 billion. ^[1]

According to SanDisk’s estimates, its total addressable market (TAM) for smartphone, tablet and other portable device storage is expected to grow from over $12 billion in 2013 to nearly $18 billion by 2020. The growth in the number of smartphones and tablets sold worldwide should contribute positively to SanDisk’s embedded storage division as all portable electronic devices use built-in storage in some form. Although the smartphone market is a mature segment in developed countries, the number of smartphones in use is expected to increase from around 2 billion currently to around 6 billion by 2020. ^[3] Increasing smartphone penetration in regions such as Asia Pacific is likely to boost sales numbers for embedded storage products. However, much of the growth in Asia and other developing economies is expected to come from lower-cost smartphone manufacturers. ^[4] As a result, this could lead to a reduction in average selling prices per gigabyte for storage companies despite improving sales numbers.

On the other hand, high-end smartphones and tablets sold by Apple (NYSE:AAPL) (also one of SanDisk’s largest OEM customers) should help boost sales owing to its product refresh in late 2014. The smartphone giant launched the new iPhone and iPad in Q4, and announced the new Apple Watch, which all use the latest storage options. The introduction of these products is expected to bring in significant revenues for storage manufacturers. As a result, Samsung (PINK:SSNLF) started producing its 6 gigabyte LPDDR3 mobile DRAM chip on a mass scale and competing chip manufacturers SK Hynix and Micron Technology (NASDAQ:MU) invested in increasing their manufacturing capacities  to address the expected surge in demand. The added competition and increased demand for embedded storage is likely to help reduce average selling prices and compress margins for manufacturers. Despite an expected decline in average selling prices for NAND flash per gigabyte in the coming years, the company expects its total addressable market to grow at a CAGR of nearly 10% in the next few years. We forecast SanDisk’s share in this market to be 12-13% through the end of our forecast period. Consequently, we expect embedded storage to generate over $2 billion in revenues for SanDisk by the end of the decade.

Removable Storage

SanDisk is most widely known for its removable storage products, which include USB flash drives, SD and micro SD external storage cards for smartphones and tablets in addition to removable storage cards for cameras and other imaging devices. According to our estimates, the removable storage division is SanDisk’s second most valuable segment, contributing about 18% of its total value. This division witnessed sustained demand for storage products during the year, with revenues flat over the prior year 9-month period at just over $1.9 billion. Despite flat revenues over 2013 levels, the contribution of removable storage to net revenues declined from 43% of overall revenues last year to about 39% this year. ^[1] The company announced the launch of its wireless storage drives – the Connect Wireless Media Drive and Connect Wireless Flash Drive – in December last year and introduced its 128GB Ultra MicroSDXC memory card in March. The 128 GB micro SD card was SanDisk’s first capacity upgrade in a microSD card in over three years. Scaling up the capacity of the existing microSD cards from 64GB to 128GB was a difficult task, as the small dimensions of a standard card offered hardly any scope for expansion. This was evidenced by the fact that it took almost three years to come up with a technology to double the existing capacity; capacity per card has now increased a thousand-fold from 128 megabytes (MB) cards in 2004 to 128 GB now. Furthermore, the company introduced iXpand flash drives in November as a storage option for Apple iPhones and iPads using the lightning connector. Although the introduction of new products and the upgraded product range should help SanDisk post strong sales numbers, we currently forecast the removable storage division to generate revenues of over $2.5 billion in 2015 – nearly flat over this year – due to an expected decline in average selling prices.

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1. SanDisk Quarterly Metrics, SanDisk Investor Relations, October 2014 [↩] [↩] [↩]
2. SanDisk Earnings Call Transcript Q3 2014, Seeking Alpha, October 2014 [↩]
3. 6 billion Smartphones in Use by 2020, Yahoo News, September 2014 [↩]
4. With Mobile Internet Ad Spending Growth of 210%, China Is The New Leader In The Industry, Daze Info, September 2014 [↩]