Data storage specialist SanDisk (NASDAQ: SNDK) designs, manufactures, and distributes NAND-based storage products directed toward everyday consumers and enterprises. SanDisk's product range includes memory cards, SSDs, and embedded storage. The company generated about 63% of its revenue from its commercial division and the remaining 37% from its retail division during the year ended 2013.
Industry prospects
SanDisk expects the flash market opportunity to increase to $38 billion by 2016, as compared to the $26 billion market in 2012. This translates to a compound annual growth rate of roughly 10%. SanDisk's estimates seem reasonable, as TrendForce predicts the NAND market to be worth $28 billion in 2014. The market opportunity can increase even further given the growth of mobile, cloud, and need for data. Moreover, IDC forecasts that the SSD solution price will decline to $2.88 per gigabyte as compared to $11.12/GB in 2012. NAND is expected to grow, but it is not going to substitute the HDD market due to factors like price and data retention.
Figure 1 Source: IDC. Note: Lower is better.
NAND use is expected grow in cloud data centers and other markets requiring high performance memory solutions.
Performance, endurance, capacity, and price are the critical success factors in the industry, and organizations are trying to achieve these through advanced process technologies and node shrinking. Node shrinking results in high density NAND in a small die-area, increasing volume and reducing the cost. However, beyond 20 nanometers the performance decreases and low endurance becomes a bigger concern. Consultant Mark Webb sees little or no cost reduction beyond 15nm. Due to these factors the industry is seeking alternatives like 3-D/vertical memory solutions. Using the lowest possible 2-D memory process technology will result in a competitive advantage in the short term, but in the longer run organizations must develop 3-D or alternative technologies to stay relevant in the industry.
SanDisk's competitive positioning
SanDisk captured roughly 23% of the NAND market opportunity in 2012.This indicates that it is a strong player in the memory market and has the ability to capitalize on the growth prospects discussed above.
Leading-edge technology
SanDisk recently announced its 15nm 1Z node manufacturing technology. This means that it will use the most advanced 2-D process technology to date, which will result in a decreased cost per bit and increased capacity. The company claims that these manufacturing benefits will not cause any performance and reliability sacrifices. If this is the case, SanDisk will be the most cost-effective manufacturer, by book, as Micron (MU 1.53%) and other major players use 16nm. Hence, SanDisk will have cost and capacity advantages which it can use to expand its market share in the coming years.
Beyond 2015, company growth will depend on its 3-D memory bit cost scalable efforts. This is because Samsung recently demonstrated that 3-D memory/vertical memory delivers the same density as planar 15nm while showing an improvement in endurance and performance. Samsung's (NASDAQOTH:SSNLF) 128Gbit 3D NAND has 10 times the endurance of planar 20nm.The cost and size associated with 3-D memory are a barrier at present, but eventually 3--D is expected to replace 2D planar memory. SanDisk may have a short-term advantage based on its 15nm 1Z planar process, but in the long term its prospects depend on how its 3-D memory technology turns out.
Investment value
SanDisk reported revenue growth in 2013 and is expected to remain on this track in the near future due to its leading-edge 15nm technology. The graph below depicts the past and future trends of the company's revenue. Taking into account TrendForce's market opportunity projection for 2014, the current market share of SanDisk, and the fact that it is leading in process technology at present, one gets the indication that 2014's revenue will surpass $7 billion.
Figure 2 Source: SEC filings and Yahoo! Finance.
The company's net profit margin is around 18% as compared to the 16% five-year average and the 6.77% industry average. SanDisk enjoys a high margin and the expectation is that it will improve going forward as the company is experiencing growth in enterprise SSD, which increased by 61% in the first quarter of 2014 and accounted for 27% of total revenue. Combine this with the expected lower cost per bit, thanks to the 15nm process, and one expects the company to post higher net incomes in the coming years.
Valuation
Assumptions:
- Growth of 10%, in line with industry prospects, is assumed in NAND until 2018. No growth is assumed beyond that.
- Aggressive capital expenditures assumption of 86% growth is assumed for 2014 and CAPEX is expected to grow in line with business growth after 2014.
- Standard CAPM assumptions and the debt level to remain unchanged.
The cash flow-based calculation reveals an upside in the valuation of the company. Moreover, the P/E is 17.62, which is slightly higher than the industry P/E. Even if we use a P/E of 18 times the target price comes to around $97.
Bottom line
NAND storage has promising growth prospects due to increasing growth of mobile, data centers, and especially SSDs. SanDisk is among the leading market shareholders of the industry. The company recently revealed its leading 15nm process, which will result in lower costs per bit. This gives SanDisk a distinct competitive edge over its competitors and will aid it in capturing market share in the coming year or so. Moreover, the company already enjoys margins that are well above the industry average. Hence, SanDisk seems to be a value investment.
