Is SanDisk a Better SSD Play Than Intel?

The red-hot SSD sector, with its robust revenue growth and solid margins to boot, has storage equipment and chip investors salivating at prospects of new growth. SanDisk (NASDAQ: SNDK  ) and Intel (NASDAQ: INTC  ) are doing much better in the SSD arena than traditional storage companies such as Western Digital and Seagate Technology. Overall, Intel's SSD revenue is higher than SanDisk's, and the giant chipmaker arguably has better wherewithal to build top-of-the-line SSD products as well. But SanDisk's SSD revenue is growing at a phenomenal rate. So, for investors that would like to play the SSD sector, which company is the better SSD bet?

SanDisk vs. Intel SSD growth
Gartner released the figures for the leading worldwide SSD vendors in June that showed that SanDisk's SSD revenue in 2013 almost quadrupled compared to 2012 sales, to reach $1.17 billion, or 19% of 2013 revenue. The company's overall revenue grew 22% year-over-year to $6.17 billion, a big improvement compared to fiscal 2012 when it declined 11%.

SanDisk's gross margin jumped from 33.3% in fiscal 2012 to 46.5% in fiscal 2013. It's not clear what the average gross margin for SanDisk's SSDs is. But, it appears that the big improvement in the company's gross margin is largely attributable to the huge growth spurt in SSD sales.

SanDisk raised its gross margin outlook for fiscal 2014 in April, on account of its better product mix, specifically because of the company's strong SSD sales. SanDisk had a previous gross margin target of 45%-48% but raised it to 47%-49.

Intel (NASDAQ: INTC  ) also had pretty good year in 2013 as far as SSD sales go. The company saw its SSD revenue grow 35% to reach $1.45 billion. Intel is now the second-largest SSD vendor worldwide while SanDisk is the third-largest. Samsung is still the SSD market leader, and its strong growth ensures that it will hold on to this position for long.

Source: The Register

Unlike SanDisk, however, Intel has a much larger revenue base ($52.7 billion in 2013 vs. $6.17 billion for SanDisk). The positive impact of SSD sales on its gross margin was, therefore, largely lost due to the diluting effects of its poorly performing segments-- the company's gross margin fell 230 basis points to 59.8%.

What does the future hold for SanDisk and Intel SSDs?
According to a June Gartner report, the SSD market grew 53.1% in 2013 to reach $10.99 billion. SSDs here include PCIe flash cards, self-contained solid-state NAND, and DIMMS (dual in-line memory modules). Mainstream SSDs used in PCs were also counted in the Garner study.

Looking at SanDisks's first-quarter fiscal 2014 results, it becomes evident that the company's strong SSD sales are continuing to have a positive impact on the company's top and bottom lines. SanDisk's revenue grew 13% during the quarter, but net income jumped 62% aided by a strong 61% growth in the company's SSD revenue. SanDisk's SSD revenue for fiscal year 2013 accounted for 19% of overall revenue--in the first-quarter, SSD revenue accounted for 28% of overall revenue, a huge improvement.

SanDisk expects SSD revenue to make up at least 25% of its overall revenue in 2014. Needless to say that the impact on its gross margin will be quite huge.

SanDisk expects its much-awaited ULLtraDIMM (flash-on-a-DDR3 DIMM), that will be used alongside DRAM DIMMS, to hit the market in 2015.ULLtraDIMM has lower latency than PCIe flash, which is typically considered the leading-edge SSD product. SanDisk also expects to commence production of the notoriously hard-to-muster 3D NAND chips in 2015, and ramp up production in 2016.

ULLtraDIMM vs PCIe flash latency. Blue lines represent PCIe flash latencies. Red lines represent ULLtraDIMM latencies.

Source: The Register

SanDisk acquired flash maker Fusion-io for an all-cash sum of $1.1 billion. The deal will be finalized during the third-quarter of fiscal 2014. Fusion-io's revenue in fiscal 2013 was $432 million, a 20% year-over-year growth. Similar growth in the current fiscal year (as per the company's guidance) would yield revenue of $518 million, thus adding about 28% to SanDisk's 2014 SSD revenue at the company's current SSD revenue growth rate.

Meanwhile, one of Intel's most promising SSD products is the SSD 525 family (30GB, 60GB, 90GB, 120GB, 180GB, and 240GB) that pack identical performance to a 2.5 inch SSD in a device only one eighth the size. The tiny ultraportable form factor mSATA drives were launched in early 2013, and deliver respectable performance of 6GB/s at a good price. The drives are designed for ultrabooks and a myriad of embedded solutions.

Source: Storage Review

Intel also unveiled new line of PCIe SSDs at Computex 2014. These new drives offer superior performance compared to the thin crop of currently available PCIe SSDs at very competitive prices.

Looking at Intel's first-quarter results, although revenue for the data center improved 11% year-over-year, gross margin remained flat, indicating the diluting effects of the company's other businesses. Intel's SSD business might not impact on its bottom-line in a tangible way until it makes up at least 10% of its overall revenue, which would take about 5 years at the current growth rate.

If Intel's promising SSD products, however, quickly gain traction, and/or the company releases a few blockbuster SSDs within the next two or so years, the wait time could probably be cut in half.

Foolish bottom line
Intel's SSD growth is still masked by its other businesses, while SanDisk's SSD revenue growth shows on its bottom-line almost immediately. Although Intel might eventually win over SanDisk as far as SSD designs go, SanDisk might be the better SSD play for the next 3-5 years.

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