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Why SanDisk Corporation Is a Solid Buy

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Memory chipmaker SanDisk  (NASDAQ: SNDK  ) has been successfully riding the smartphone wave and the growing adoption of solid-state drives (SSDs). So, it wasn't surprising when the company reported terrific fourth-quarter results that beat Street estimates. Driven by business from Apple (NASDAQ: AAPL  ) and a partnership with a key storage player such as Western Digital (NASDAQ: WDC  ) , SanDisk has a lot going for it right now.

SanDisk's quarterly revenue was up 12% year over year. However, its non-GAAP net income shot up almost 52% from the year-ago period, driven by a massive improvement in its gross margin. SanDisk's non-GAAP gross margin came in at 50.9%, up from 39.9% last year, as a result of cost reductions and a favorable product mix. However, SanDisk issued a soft guidance, while a downgrade by Needham to "Buy" from "Strong Buy" weakened the stock post earnings. 

But then, for the long-term investor, SanDisk is still good value. It is trading under 19 times earnings, which seems cheap for a company whose earnings are expected to grow in double digits over the next five years. More importantly, SanDisk has enough catalysts to propel its stock higher. 

The SSD opportunity
SanDisk's SSD business is growing at a terrific pace. At the end of the previous quarter, client and enterprise SSD sales accounted for a fifth of the total revenue as SanDisk enjoyed the benefits of its SMART Storage acquisition along with stronger adoption of its SSD products. SanDisk expects its SSD business to grow further on the back of the SMART acquisition, and the company has already achieved a number of new design wins with several important customers. 

Earlier this month, an enterprise SSD developed by SMART saw its first customers in the form of a Tier 1 storage company and a server OEM. Going forward, SanDisk can expect more such customer wins in both enterprise and client SSDs as the market further develops.

The enterprise SSD market is expected to grow at a CAGR of 59% through 2011 to 2016. According to a study, shipments of enterprise SSDs are expected to rise to 3.9 million units in 2016 from just 382,000 units in 2011, clocking revenue of $3.5 billion. SanDisk's SMART Storage acquisition should help it capture this market.

According to another report from IHS iSuppli, client SSD shipments are expected to increase to 239 million units in 2016, up from 39 million units in 2012. The need for better performance, slim form factor, longer life, and instant accessibility to data should help SSDs displace much of traditional hard-disk drives (HDDs) in the next few years. In fact, according to the IHS report, SSDs will represent 40% of the HDD market by 2016, and SanDisk is already making progress as it is seeing higher attach rates for its solutions. 

Also, SanDisk is working on innovative solutions such as hybrid storage drives. In May of last year, SanDisk entered into an agreement with Western Digital to develop solid-state hybrid drives in an effort to spur adoption. Under this agreement, SanDisk is supplying Western Digital with SSDs to be integrated into its hard drives. Late in 2013, Western Digital launched its hybrid Black dual drive that fused a 120GB SSD with a 1TB HDD, which is probably a product of this venture. Through such partnerships and innovations, SanDisk is making the right moves to increase its presence in the SSD market.

The mobile opportunity
Mobile products account for almost half of SanDisk's overall revenue, and Apple is one of the primary drivers of revenue in this segment. According to Fool contributor Adam Levy, Apple probably accounted for almost a fourth of SanDisk's revenue in the third quarter. SanDisk supplied flash memory for the iPhone 5 and it looks like it has gained further ground with the latest iPhones as the bump in revenue and earnings shows.

In addition, it is expected that the next iteration of iPhones from Apple, which are expected to be more revolutionary rather than evolutionary, could boost SanDisk's prospects. Susquehanna Financial Group believes that given SanDisk's strong standing with Apple, it is well-positioned to gain from the next iPhone(s) later this year. Moreover, Apple's China Mobile deal can provide further impetus to SanDisk as analysts expect this venture to help Apple add around 15 million to 30 million units this year.

Finally, SanDisk is also making progress in the Chinese smartphone market, where it is strengthening its position at mid-range smartphone makers. This should enable SanDisk to profit from the fast-growing budget smartphone market in China. The Chinese smartphone market is expected to be worth $120 billion by 2017, up from $80 billion currently, driven by sales of 460 million more handsets. So, SanDisk is making the right move by concentrating on the Chinese smartphone market to drive sales volume.

The bottom line
SanDisk's outlook for the current quarter might not be a stellar one, but the company surely has enough catalysts to keep growing. Its two most important end-markets -- mobile and solid-state drives -- are doing well. The stock is a good value and coupled with its shareholder-friendly intentions, it appears to be a solid buy.

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Harsh Chauhan

Harsh has been covering technology, and sometimes retail, since 2011. He is focused on finding great businesses for the long run. You can follow him on twitter @techjunk13

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