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Segment Slowdown Won't Hit SanDisk (SNDK), Too Many Opportunities Abound - Barron's

February 4, 2013 11:41 AM EST Send to a Friend
SanDisk (Nasdaq: SNDK) shares are active following a bullish report in Baron's over the weekend.

The company makes NAND flash memory for most portable electronic devices, including smartphones and laptops. For example, NAND is featured in Apple's (Nasdaq: AAPL) iPhone 5. The chips don't come cheap either; Apple paid about $21 for the penny-sized memory chip in its 32-gigabyte (GB) iPhone 5, the second most-expensive component.

Despite the price of NAND dropping for the better part of a decade on process improvements and cost cuts, Barron's notes that SanDisk prices actually went up in the fourth-quarter 212, leading to a 30 cent per share earnings beat for the quarter.

SanDisk and peers have taken a broader look at the market, deciding to slow production after getting hit with oversupply issues in 2011. SanDisk's strategy chief, Sumit Sahana, believes that industry growth in 2013 will be at the slowest pace ever.

Demand is still there and some believe that SanDisk may be able to cut costs by an additional 20 percent. One analyst from Needham & Company pointed to an improvement in gross margin (to 40 percent in Q412, from expectations of 33 percent). He has a price target of $60 on SanDisk, but thinks $65 to $70 is achievable.

With an 11 times forward earnings model and $15 per share in cash, SanDisk could move to $70, Barron's noted. Over the last 10 years, the stock has traded between multiples of eight and 32 times.

SanDisk isn't the biggest player in the industry; Samsung holds about 40 percent of the market, SanDisk is second at 28 percent, Micron (Nasdaq: MU) at 20 percent, and SK Hynix at 12 percent. SanDisk could benefit recent litigation between Apple and Samsung, as Apple looks to diversify itself away from ties to the rival. Apple now accounts for about 13 percent of SanDisk's revenue following the inclusion of its technology in the iPhone 5.

Amid fears of a slowdown in high-end smartphone sales, SanDisk has a wide customer base and plenty of growth opportunity to offset any industry slowdowns.

Shares are about flat on the session Monday.




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