2 Reasons Why This Apple Inc. Supplier Will Continue Its Amazing Run

Flash memory maker SanDisk (NASDAQ: SNDK  ) has seen some weakness in the month of April. The broad market sell-off has led to a 7% drop in SanDisk's stock price this month, but the company's recently reported first-quarter results confirm the fact that its long-term story is intact. The rising demand for solid-state drives (SSD), along with key customers such as Apple (NASDAQ: AAPL  ) and Western Digital (NASDAQ: WDC  ) have been tailwinds for SanDisk, helping it post terrific results.

SanDisk's revenue increased 13% year over year in the reported quarter, while earnings came in at $1.44 per share, an impressive rise from $0.84 a share last year. In addition, SanDisk's guidance is also strong. The company expects revenue between $1.55 billion and $1.63 billion in the second quarter, ahead of the $1.58 billion Wall Street consensus. 

SanDisk's results were driven by strong sales of high-end solid-state drives, along with a robust performance in retail sales. Moreover, as SanDisk's product mix improved in the previous quarter, the company's gross margin increased to 51.2% from 40.5% a year earlier on a non-GAAP basis. Going forward, there is a good chance that SanDisk's performance will continue improving as it is gaining share in the client and enterprise markets.

Strength in data storage
The solid-state drive business accounts for 28% of SanDisk's revenue. A vertically integrated business model in this segment has enabled SanDisk to deploy its solutions at an accelerated pace and at lower costs. Now, the company is expanding its offerings and announced four new additions to its CloudSpeed line of SATA SSD's last month. These new drives are expected to deliver business-critical performance and can be customized by customers according to their needs.

Data storage has grown at a rapid pace in the last couple of years, and this has given rise to the need for high-performance solutions. This is exactly what SanDisk is trying to deliver with its products. Moreover, SanDisk had partnered with Western Digital last year to tap the market for hybrid drives as well. Both companies collaborated last year to make Western Digital's first hybrid drive.

As the market for hybrid drives is slated to grow to 25 million units next year, from just 10 million this year, SanDisk is doing the right thing by partnering with a leader in data storage, Western Digital. Western Digital enjoys a market share of 48% in the enterprise space. Although it is a competitor in certain segments to SanDisk, the agreement could help the company grow sales going forward as it is supplying SSDs to Western Digital for the hybrid drives.

The mobile focus
SanDisk's embedded solutions are also doing well. There was a slight drop-off in sales of custom embedded products in the previous quarter, but this was expected as Apple slowed down iPhone production. But, SanDisk expects this segment to return to growth from the second quarter onward.

SanDisk launched its iNAND Extreme embedded storage solution in February, targeting mobile devices. SanDisk believes that this new solution will increase the responsiveness and multi-tasking capabilities of smartphones and tablets. Now, SanDisk is a key Apple supplier, with 20% of its revenue coming from the Cupertino-based giant in fiscal 2013. 

This year, Apple has some exciting plans in store. Leaks suggest that Apple has gone in for a major design change with the next iPhone. In addition, the rumor mill also expects Apple to come out with a bigger, 4.7-inch iPhone, and follow it up with a 5.5-inch phablet.

Although late, this would be a smart move on Apple's part since phablet sales are expected to boom going forward. According to Juniper Research, phablet shipments are expected to rise to 120 million units globally by 2018 from just 20 million units this year. So if Apple manages to strike gold in phablets with its rumored device, SanDisk will also stand to benefit.

Apart from Apple, SanDisk CEO Sanjay Mehrotra claims that the company is now supplying memory products to "all major smartphone vendors in China." The Chinese smartphone market has found a new growth driver on the back of the TD-LTE roll out. As such, when consumers start upgrading to the latest 4G handsets, shipments will grow and ultimately lead to higher demand for SanDisk's solutions.

The takeaway
SanDisk is doing well. The company reported really strong results with growth across the board. Its focus on a high-margin market such as enterprise drives and a volume-driven market such as mobile devices should help it deliver solid gains to shareholders in the long run. Moreover, the stock isn't too expensive at 17 times last year's earnings, and a dividend yield of 1.20% makes it even more attractive.

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