2012 Preview: SanDisk

With 2011 finally in the books, it's time to reflect on what has transpired this year and what companies could be facing business-altering decisions in 2012. On today's plate we have flash memory chip provider SanDisk (Nasdaq: SNDK  ) .

But before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot at how 2011 treated shareholders.

Price-to-Earnings (TTM) 10.0
Price-to-Sales (TTM) 2.1
Cash/Debt $2.55 billion / $1.58 billion
Projected 5-Year Growth Rate 18.1%
Forward P/E 9.7

Source: Yahoo! Finance; TTM = trailing 12 months.

For the most part, 2011 was pretty much a wash for SanDisk shareholders -- and investors should be pretty thankful for that. Potential supply- and demand-side worries emerged from the Japanese earthquake in March and more recently from flooding in Thailand, but nothing seems to have derailed SanDisk's growth thus far. But these results are in the past. Let's look ahead and see what could be driving SanDisk's stock price in 2012.

What to expect
As always with SanDisk, the greatest threat to its bottom line relates to how well it can exert some semblance of control over NAND flash memory pricing. As the market leader in this type of memory, allowing digital imaging devices to store memory when turned off, investors would like to think that SanDisk will reduce inventory to stave off oversupply.

A recent note from Goldman Sachs, however, would indicate otherwise. Goldman thinks there's a strong possibility of NAND oversupply in the first quarter of 2012 and believes that pricing could therefore be depressed. Data from DRAMeXchange would also agree with this assumption. From the first half of December to the second half, NAND flash memory prices fell anywhere from 3% to 8% across various gigabyte ranges, and the trend looks likely to continue. A complex mix of Thailand flooding and an early Chinese New Year are being attributed as reasons for the weakened demand and an oversupply of flash memory chips.

Another closely monitored figure in 2012 will be SanDisk's gross margin. I've often harped in the past on the fact that SanDisk has a hard time keeping its costs under control. We've witnessed this problem in action over the past year, with the company reporting higher revenue but on the back of three consecutive quarters of year-over-year net income declines. Gross margin fell 170 basis points over the year-ago period in the second quarter and plummeted by 860 basis points from a year ago in the third quarter. Rising costs are squarely at fault, and SanDisk will need to address ways to control its costs despite a cash-rich balance sheet if it hopes to end 2012 higher.

Foolish roundup
We could very easily be looking at a diverging year for DRAM and NAND memory pricing. DRAM players Micron Technology and Rambus are sitting much prettier than SanDisk as DRAM prices have had a remarkable jump off their lows in December. Oversupply worries for DRAM chips also aren't nearly as much of a concern as they are with NAND memory chips.

In short, SanDisk has quite a mountain to climb in 2012 if it expects to head higher. Falling NAND prices and rising costs coupled with demand disruptions tied to flooding in Thailand just seem to be too much of a challenge based on the current EPS estimates. I don't see much of anything to be bullish about from a shareholder's perspective, and as such, am making an underperform CAPScall on SanDisk for 2012.

What are your thoughts on SanDisk heading into 2012? Share them in the comments section below, and consider adding SanDisk to your free and personalized watchlist to keep track of the latest news with the company.

If you're looking for one more great idea heading into the new year, consider downloading a copy of our latest special report, "The Motley Fool's Top Stock for 2012," in which our top-notch team of analysts highlight a company dubbed the "Costco of Latin America." The best part is the report is completely free!

Fool contributor Sean Williams has no material interest in any other companies mentioned in this article. He often tells his friends to take a picture of him working; it'll last longer that way. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always the best price: free!


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