SanDisk (NASDAQ:SNDK) is set to release earnings on Wednesday after the market closes, and investors will have a lot of numbers and information to go over. Some investors may be wondering if it's time to take some shares off the table, after the stock has run up over 50% year to date. The company faces strong competition from Micron Technology (NASDAQ:MU) in enterprise storage and flash memory, and both have made acquisitions to strengthen their market positions. Meanwhile, the next iteration of the Apple (NASDAQ:AAPL) iPhone could represent another opportunity for SanDisk to grow revenue in the second half of the year.
Here are three things for investors to focus on when SanDisk reports.
More color on Fusion-io
Last month, SanDisk agreed to acquire Fusion-io for $1.1 billion in cash. Although the deal isn't expected to close until this quarter, investors should look for additional color in comments from management in the upcoming earnings release.
Investors should look for more information on how SanDisk plans to integrate Fusion-io's products with its own in order to expand the acquired companies customer base. Currently, Fusion-io's customer base is heavily concentrated in a few big players such as Apple. SanDisk has the size and customer base to expand that.
Additionally, management ought to give some color on how Fusion-io expands the company's opportunities in the enterprise SSD market. The memory market is becoming increasingly concentrated with the big names snatching up smaller players. Last year, Micron bought Elpida to strengthen its DRAM division.
Shifting focus to improve margins
SanDisk has dramatically improved its gross margin over the last two years. The improvement can be attributed to its shift in product mix toward more enterprise SSDs. Last quarter, SanDisk's cost per gigabyte decline 23% year over year, while average sales price declined just 7% year over year. As a result, gross margin improved significantly.
For the second quarter, management expects gross margin to come in between 47% and 49%. That's lower than the first quarter, as management expects the product mix to shift more toward embedded solutions. The Fusion-io acquisition may help shift the balance again in the second half, but for the second quarter, expect slightly lower gross margin.
The midpoint of management's guidance -- 48% -- still represent a huge improvement over the 45.8% gross margin the company posted in the second quarter last year. As long as management hits the mark on this one, and gross margin continues to improve year over year, investors should be very happy.
What does management say about the future?
Lastly, investors should pay close attention to management's guidance for the third quarter. SanDisk's big run has come as earnings growth accelerated. That run seems to be over, with analysts expecting a mere 15% increase in earnings in the second quarter after a 71% increase in the first quarter.
Investors should pay attention to management's guidance for the third quarter. Currently, analysts expect to see earnings decline over this period. In the coming quarter, SanDisk could benefit from the upcoming iPhone 6 launch. The company makes flash memory for Apple's smartphone, and this next iteration is expected to be a major update. As a result, unit sales expectations are higher than ever.
SanDisk isn't the only company benefiting from the iPhone 6. Micron's Elpida should make the DRAM for the device as it has in its predecessors.
Even with the help of Apple, SanDisk may have trouble growing earnings past last years high levels. The embedded solutions products will still add significantly to revenue, but the margins are thinner than on SanDisk's SSDs.
Will investors pay the price?
SanDisk currently trades at a premium valuation compared to its peers. Its trailing P/E ratio of 22 is well above Micron's P/E of 13.8. As such, even a small amount of disappointment in SanDisk's earnings report could cause a harsh drop in the stock price. Investors holding on for the long haul ought to pay attention to how management plans to grow into its valuation through Fusion-io and its expanding gross margin.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.