Is SanDisk's Recent Drop a Buying Opportunity?

Flash memory supplier SanDisk (NASDAQ: SNDK  ) fell 13% after releasing its second-quarter results, bringing a halt to its terrific run this year. Surprisingly, SanDisk's current-quarter guidance fell below Wall Street's expectations, as it was unable to manufacture enough chips to meet the growing demand for solid-state drives, or SSDs, and other memory applications.

SanDisk is an Apple (NASDAQ: AAPL  ) supplier, so the company's weak guidance took investors by surprise, as reports suggest that the iPhone is going into production this month. However, looking beyond the drop and weakness in the current quarter, it is clear that SanDisk is making solid progress. The stock has become cheap after its latest crash, with a trailing P/E of less than 20, which might encourage investors to buy more shares.

Strong growth in SSDs
SanDisk reported substantial growth in its enterprise SSD business, which more than doubled on a year-over-year basis. This was driven by gains in both SaaS and SATA products. SanDisk has a well-diversified portfolio of enterprise flash solutions, which has allowed it to tap a large number of customers who are increasingly using flash to optimize their workloads.

For example, SanDisk's 2-terabyte Optimus Eco SSD has been selected by a Tier 1 storage company for its all-flash array offering. This customer might be Western Digital (NASDAQ: WDC  ) , which is strengthening its position in flash array to improve the enterprise business. Western Digital had invested in flash-array start-up Skyera to gain expertise in enterprise-class SSDs, and it might be tapping SanDisk for the same. 

Western Digital is a leading player with 45% market share in the storage space. Its enterprise revenue has been growing at a faster rate than the SSD enterprise market. Western Digital has also strengthened its SSD business by acquiring sTec, gaining access to over 100 SSD patents. So, SanDisk's relationship with this leading storage company can open new avenues in the cloud and data centers.

Innovation is key
SanDisk's solid performance in SSDs has been driven by its focus on delivering high-performance and high-density SaaS solutions. In the second quarter, it launched a 12-gigabit SaaS SSD and a 4-terabyte Optimus MAX SaaS SSD. The 4-terabyte MAX SaaS SSD is seeing strong demand, receiving a lot of customer interest for replacing legacy 15K and 10K rpm hard-disk drives in mission-critical storage and data-center applications.

The company has also recently made a strategic acquisition in the form of Fusion-io. By acquiring Fusion-io, SanDisk's enterprise PCIe hardware and software solutions will improve. The company expects to deliver value-added solutions to customers and augment its capabilities with new solutions and channels.

SanDisk achieved record quarterly revenue growth in client SSDs. The company is intent on sustaining this momentum, and recently introduced the SanDisk Extreme PRO, which is a high-performance client SSD with approximately 1 terabyte class capacity. The company is also preparing to ship its X3-based client SSDs in retail and distribution channels, and start qualifications with OEM customers in the third quarter.

Moreover, driven by the increasing attach rate of SSDs to notebook computers, especially in corporate PC platforms, SanDisk's prospects should improve. Intel has stated that the PC market is expected to gain some stability due to demand from corporate clients, so SanDisk should see better demand going forward. 

Apple to drive mobile
Apart from PCs and SSDs, SanDisk is also poised to profit from mobile devices. As already mentioned, SanDisk is an Apple supplier, providing memory for both iPhones and Macs. Toshiba and Samsung lost their MacBook slots to SanDisk last year, which indicates its growing stature at Apple. So, with the iPhone 6 expected to sell in record numbers over its lifetime, SanDisk should benefit.

The Wall Street Journal reports that Apple has asked suppliers to manufacture 70 million-80 million iPhones, higher than the 50 million-60 million units produced last year.  As a result, SanDisk can still get back on track on the back of solid iPhone production this year.

The bottom line
SanDisk's outlook for the ongoing quarter wasn't too good, but the company's innovation and prospects look strong. Moreover, in the coming years, SanDisk's earnings are expected to grow at a rate of 18.75% per year, better than the industry average of 15.70%, which is another reason it could be a good investment on the pullback.

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