SanDisk Showcases New Products At CES 2015 (Part 2)

SanDisk (NASDAQ:SNDK) announced the launch of two new solid state drives (SSD) and a flash drive for android devices at CES 2015 this week. In the first part of the article, we discussed the two new SSDs and SanDisk’s presence in the client SSD market. In this article we take a look at the newly introduced flash drives for android devices, which are similar to the iXpand flash drives it introduced for Apple (NASDAQ:AAPL) devices in November.

See our complete analysis of SanDisk here

SanDisk Ultra Dual USB 3.0

Barely a month after SanDisk released the iXpand flash drives for iPhones and iPads, the company announced the USB flash drive for Android devices. The flash drive named Ultra Dual USB 3.0 has both a USB connector and a microUSB connector to transfer data to and from Android-based smartphones and tablets that support USB on-the-go (OTG) facility. The basic idea behind introducing these flash drives for portable devices, compatible with respective operating systems (iOS and Android) is that it makes transferring data convenient than existing available options.

Apple devices and Google’s (NASDAQ:GOOG) Nexus range of smartphones and tablets do not come with a memory card slot to expand the available storage space. As a result, users choose pre-specified storage options for portable devices with storage ranging from 8 gigabytes to 128 gigabytes. Cloud storage providers such as Google, Apple and Microsoft (NASDAQ:MSFT) want users to get used to the idea of cloud-based storage that the company offers through Google Drive, iCloud or SkyDrive. Furthermore, the read/write speeds for embedded flash storage are much faster than add-on storage, making these devices much faster and theoretically more efficient than corresponding devices running apps/reading data from microSD cards.

When it comes to transferring data to and from smartphones and tablets, there are a number of options available to users such as hooking up a data cable to a computer or cloud-based backup of photos, videos, music and other data. There is also the option of transferring data through wireless storage drives offered by SanDisk, Western Digital (NASDAQ: WDC), Seagate (NASDAQ:STX) and Toshiba. However, these options have various constraints ranging from bandwidth bottlenecks in the case of wireless drives, slower speed of transfer in the case of cloud storage coupled with growing skepticism after recent cyber hacks and leaked celebrity photos; or even something as trivial as tangled wires in case of data cables and FireWires. Moreover, the process of transferring data from removable memory cards could be a fairly tedious process – it involves shutting down the host device (smartphone/tablet), removing the back cover, dislodging the microSD card from its slot, inserting that card into a card reader and then finally inserting the card reader into the designated slot in computers to transfer data. The other way of transferring data on a microSD card already plugged into a device is by using the data cable, which used the media transfer protocol (MTP). The downside of using that approach is that it can corrupt files as the host system gets block-level access to the files stored on the memory card, while plugged in the portable device.

Despite the complexity in transferring data with expandable memory and/or the risks associated with it, most major Android smartphone and tablet manufactures such as Samsung (PINK:SSNLF), LG, HTC, Motorola (NYSE:MSI), Lenovo and Huawei offer devices with a memory card slot. For context, over 1,700 of the 1,872 (or over 90%) of the Android smartphones currently available in the market (as listed on popular website GSM Arena) are available with a memory card slot. ^[1] Similarly, 325 of the 355 of the currently available listed Android-based tablets have a card slot. ^[2]. With the introduction of the Ultra Dual USB 3.0 (and iXpand flash drives), SanDisk intends to offer customers an alternative to transfer data conveniently. The Ultra Dual USB 3.0 could cater to a massive customer base worldwide, given that Android smartphones constituted over 80% of total of about 1.3 billion smartphones sold in 2014.

According to IDC forecasts, smartphone sales are likely to grow at a CAGR of 9.8% from 2015 through 2018, with a base figure of 1.4 billion smartphone sales in 2015. ^[3] The market share of Android smartphones is expected to be over 80% through this forecast period. Similarly, IDC expects tablet sales to grow at about 5% annually from 235 million units sold in 2015 to 286 million tablets sold in 2018. ^[4] The share of Android-based tablets is expected to be around 65% of the total market space. This gives a total addressable market size of over 1.2 billion devices in 2015, growing to almost 1.7 billion devices by 2018.

Taking a conservative estimate, let us assume that one USB flash drive is sold for every 40 Android portable device sold in next few years. This gives a total market of about 30 million flash drives sold in 2015, rising up to about 45 million drives sold in 2018. SanDisk currently has a 25-26% market share in the flash drives market. Given the early movers advantage SanDisk is likely to enjoy in this market segment, it could comfortably enjoy a market share of over 30% in this domain, giving it an additional 10-15 million USB flash drives units sold. We currently forecast SanDisk to sell 117 million USB flash drives in 2015, growing to 175 million units sold by the end of our forecast period.

SanDisk has priced these flash drives at $23 for a 16GB drive and $65 for a 64GB drive, making it more than twice as expensive as regular flash drives on a price per GB basis. Similarly, the iXpand flash drives are priced at $60, $80 and $120 for 16GB, 32GB and 64GB drives, respectively, which translates to a price per GB ranging from $1.80 per gigabyte to $3.80 per gigabyte. This is significantly higher than the standard USB flash drives, which are currently selling for prices as low as 40 cents per gigabyte of storage. A growing mix of iXpand/Ultra Dual flash drives could help expand revenues for SanDisk’s USB flash drive revenue stream. We currently forecast SanDisk’s price per GB for USB drives to decline to around 8 cents a GB through the end of our forecast period. If the price per GB declines at a lower rate, to about 12-13 cents per GB through the end of the decade, it could imply a 3-4% upside to our $94 price estimate for the company’s stock. You can modify the interactive chart below to gauge the effect a change in average price per GB of USB flash drives would have on our price estimate for SanDisk.

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1. GSM Arena Find Phone By Filter, GSM Arena, January 2015 [↩]
2. GSM Arena: Find Tablet By Filter, GSM Arena, January 2015 [↩]
3. Worldwide Smartphone Sales Forecast, IDC Press Release, December 2014 [↩]
4. Worldwide Tablet Sales Forecast, IDC Press Release, November 2014 [↩]