Can SanDisk Continue Its Terrific Run After Second-Quarter Earnings?

Up 50% this year, will SanDisk's upcoming earnings report propel it higher?

Jul 8, 2014 at 12:30PM

SanDisk (NASDAQ:SNDK) has been trading at all-time highs on the back of terrific growth over the last few quarters. The flash memory maker boasts of partnerships with the likes of Western Digital (NASDAQ:WDC) and Apple (NASDAQ:AAPL), while favorable trends in the memory industry are enabling SanDisk to grow its gross margin at a terrific pace. In fact, in the first quarter, its gross margin jumped to 51.2% from just 40.5% in the year-ago period. 

SanDisk's second-quarter earnings report is set to be released on July 16. So, it is a good time to check out the company's prospects and see if it will continue its terrific run.

Expectations and more
SanDisk is expected to report a jump of 8% in revenue to $1.6 billion, while earnings are expected to come in at $1.39 per share, up from $1.21 per share last year. Given SanDisk's favorable product mix, a decreasing cost per gigabyte, and increasing average selling price per gigabyte, it should be able to achieve the targets. 

In the first quarter, SanDisk's blended cost per gigabyte improved 23% year over year, while its average selling price per gigabyte was up 7%. The company's SSD products are finding solid traction in the client and enterprise markets, improving its product mix in the process. As the SSD market is expected to continue growing at a rapid pace, the company's prospects in this market look strong.

Moreover, SanDisk is a key Apple supplier, with 20% of its revenue coming from Cupertino in the previous fiscal year, as its products are used in MacBooks and the iPhone. This year, Apple is expected to make revolutionary product announcements that could spur sales, and most of its component suppliers are expected to benefit as a result.

SanDisk supplies flash memory and SSDs to Apple. According to Mehdi Hosseini of Susquehanna Financial Group, SanDisk could be "one of the prime beneficiaries" of the next iPhone. Hosseini points out that SanDisk is an important supplier of flash memory and embedded products, and the next iPhone will be a much more meaningful refresh than the last two. As a result, Apple's sales should increase. 

Moreover, Apple's rumored 5.5-inch phablet is expected to sport 128GB of memory, according to AppleInsider. Bigger memory size will bring in more revenue for SanDisk. For example, a 128GB iPad Air leads to a $60-$80 increase in Apple's costs, according to estimates, which should filter down to SanDisk's top line. 

Strong prospects in storage
It is clear that SanDisk is on track to profit from a couple of key trends in the technology industry -- storage and smartphones. These two end-markets will help the company issue a strong outlook for the back half of the year, and also for the long run.

For example, the storage industry is seeing strong secular growth, driven by increasing data consumption due to growth in data-intensive applications. According to The Motley Fool's senior analyst Jim Mueller, data storage requirements are expected to grow to 6,000 exabytes in 2020, from less than 1,000 exabytes needed in 2014. (One exabyte is one million terabytes, while a terabyte is one thousand gigabytes.)

Enterprise systems will be the primary driver behind this growth, and SanDisk has the right partnership in the form of Western Digital to benefit from this trend. SanDisk and Western Digital are partnering to develop hybrid drives. The hybrid drive market is expected to grow to 25 million units next year, from only 10 million units this year.

Last year, the two companies partnered to make Western Digital's first hybrid drive. SanDisk is the supplier of SSDs to Western Digital in this partnership, which might be one of the reasons why it saw strong demand for client SSDs last quarter.

Watching its back
While Western Digital might be a partner, it is also a competitor for SanDisk. Western Digital is making solid moves in the enterprise storage space, commanding 48% of the market. To counter the threat, SanDisk recently improved its standing in enterprise by deciding to acquire Fusion-io for $1.1 billion. 

The Fusion-io acquisition will allow SanDisk to strengthen its enterprise flash storage business, and allow it to more effectively tap data centers. Fusion-io is a specialist technology player in the storage space, and its acquisition by SanDisk is an example of vertical integration. Last year, Western Digital acquired sTec in a bid to bolster its own enterprise offerings, and SanDisk's latest acquisition is a move in the same direction. 

The takeaway
SanDisk is up more than 50% so far this year, but it hasn't run out of steam, yet. The best is yet to come, as Apple ramps up iPhone production and the storage market grows. In addition, it is likely that SanDisk will release a strong quarterly report once again, and investors can get all the news and analysis regarding the same by using the personalized Watchlist feature here.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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