It's amazing how often the experts can be wrong. Today's case in point: flash memory juggernaut SanDisk
Yesterday's earnings release has a lot of Street watchers picking their jaws up off the floor, including, I imagine, the good folks at UBS who downgraded the stock earlier this week. (Snicker.) But I wasn't blown over. Sure, I was very happy to see the company blow away both earnings and revenue estimates. I own shares. How could I not do a little victory dance? But completely surprised? Hardly.
SanDisk put up $0.55 per share, while the experts predicted $0.35. It was accomplished by inflating the top line by more than 44% over the prior-year period and boosting earnings per share by nearly 90%.
But here's a dirty secret. It was easy to see that SanDisk was fixing to knock one out of the park. I'm not going to claim I could have pegged the earnings or cash flow growth (which was also huge, by the way). But there were literally dozens of clues that SanDisk was getting ready to really pour it on, which is why I added to my position a few weeks back.
Chief among the clues was a little company called Apple
There was no flash glut that many analysts keep predicting -- review this tripe -- with the result that the price for raw flash memory wasn't falling nearly as quickly as some projected. The trend was even confirmed by early results from Asian chip makers. Still, the SanDisk downgrades came. These were, not to put too fine a point on it, idiotic.
Quite simply, all evidence added up to good things for SanDisk. As the gorilla in the end-product space, it can continue to push down retail prices to stimulate demand. But because it produces a large portion of its own raw flash through a partnership with Toshiba, it can get better margins than its competitors, who are stuck between a rock and a hard place. They must match SanDisk on the retail prices or lose sales, but they're also forced to buy their raw flash on the open market, where prices are firm. (Oh, and many of them are forced to pay SanDisk licensing fees even when they get their products out.)
It played out this way for SanDisk: Product gross margins grew to 37%, much better than anyone expected, especially considering they're just getting their new chip fabs up and producing. Overall gross margin -- which is boosted by those revenues from intellectual property licensing, which carries a near 100% margin -- grew to 44%.
The only quibble I can find is that operating expenses grew by 1 point as a percentage of revenues, but (you heard it here first) I say that's a good thing. Why? Because, quite simply, SanDisk needs to ramp up its R&D, sales, and marketing in order to fully capitalize on the potential for its products. There are still major markets in which SanDisk has not been able to compete because it didn't have enough product to go around. With its new fabs coming on line, it will have the supply to fill the increased demand.
Finally, SanDisk is making the kinds of moves that put it in an increasingly strong market position. (I wonder whether my colleagues at Motley Fool Rule Breakers are paying attention here.) To my mind, SanDisk is starting to look a little like Intel
This quarter, SanDisk announced strategic moves into digital rights managed music chips, bonus-content video-game memory, a growing stable of music players, a rights managed, "digital backpack" type flash drive for students, a secure computing environment flash drive for road warriors, plus the hiring of key executives charged with implementing longer term goals of expanded technology, supply, and operations management. If you need further evidence that flash is the wave of the future, just take a look at the panicked hard-drive execs have been grousing in a very public fashion that their technology is not dead. Sounds to me like the cries of those who are stuck on a sinking ship.
I don't blame them. It looks like SanDisk is just getting started.
For more flashy Foolishness:
- SanDisk's slam dunk: Fool by Numbers.
- NAND flash has dazzled investors.
- Given the accuracy of analysts on SanDisk, I wonder why anyone pays them any attention.
- The new Kodak? It ain't Kodak.
- See why SanDisk stank, but I didn't sell.
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Partisan Seth Jayson uses nothing but SanDisk memory cards. At the time of publication, he had shares of SanDisk but no position in any other company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.