Why SanDisk Corporation Shares Could Drop Even Further

SanDisk's  (NASDAQ: SNDK  )  impressive and long-running share-price growth came to a screeching halt last week after the company announced second-quarter earnings. Selling price erosion, decreasing gross margin, and guidance that failed to meet analysts' expectations all led to a price drop of over 13% in the days following the announcement.

SanDisk remains a healthy and growing company. It might therefore seem reasonable that the current drop in price makes for a good moment to buy. However, thanks to SanDisk's long-term, solid performance, the company's share price probably still reflects unrealistic expectations that are likely to come crashing down as SanDisk faces normal setbacks and challenges. Let's take a look at some reasons why SanDisk might fail to meet expectations.

Increasing SSD competition
SanDisk has been making a killing in the solid-state drive, or SSD, market. Its revenue from SSDs grew 65% in 2013, and in the most recent quarter, SSDs accounted for 29% of the company's total revenue. Looking forward, CEO Sanjay Mehrotra has stated that he expects increasing revenue growth for both client and enterprise SSDs throughout the rest of this year.

But such a growth market is inevitably attracting new and serious competition. Hard-disk powerhouse Seagate  (NASDAQ: STX  ) has been looking for growth opportunities, and it recently acquired flash-related assets from Avago. This acquisition should immediately make it a contender in the SSD market, and Seagate will certainly seek to grow its $150 million flash business at the expense of more established players like SanDisk.

Thanks to being vertically integrated in the flash/SSD market, SanDisk might have an advantage in the long term over companies like Seagate. But it won't have this advantage over flash rival Micron (NASDAQ: MU  ) , which views SSDs as one of its biggest opportunities. Over the last two quarters, Micron increased its sales of SSDs by 50%, and the share of Micron's flash that went for SSDs grew from 12% to 20%, showing the company's level of commitment.

Samsung has the lead in the newest technology
The flash industry is beginning a transition from the current form of flash technology, called planar NAND flash, to a new, stacked form of flash called 3D NAND. The problem for SanDisk is that the world's top flash and SSD producer, Samsung (NASDAQOTH: SSNLF  )  , has a sizable lead in 3D NAND. Samsung is the only flash provider to start volume production of 3D NAND, and it just released the first commercial 3D NAND SSD.

Planar NAND will remain relevant as flash producers work to reduce 3D NAND costs. SanDisk expects to have significant 3D NAND production by 2016, and management has said that they feel "really very good" about their technology roadmap. Still, as the rave reviews for the new 3D NAND SSD indicate, Samsung already has a good handle on the new technology, and it will likely reap the benefits as the other flash producers try to catch up.

Is it time to panic?
SanDisk is a solid company and it continues to have good prospects. It expects to achieve a record level of revenue this year thanks to current initiatives such as its focus on SSDs. Looking further down the line, it has invested in exciting new technologies such as memory-bus flash, and its vertically integrated position in the flash market should give it advantages over certain competitors.

However, investors who have grown accustomed to only hearing positive news coming from SanDisk, and to seeing corresponding increases in the company's share price, might be in for a rude surprise. While SanDisk continues to look good, its stock price might have a bumpy ride as investors realize that SanDisk, too, faces challenges and setbacks like any other company.

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