SanDisk Corporation (NASDAQ:SNDK) is a leader in NAND flash storage solutions and software. NAND is a flash storage technology which independently retains data without power. It reduces the cost-per-bit, and elevates chip capacity that enables flash memory to compete with traditional storage devices such as hard disks.
I believe over the next few years, rapidly growing demand for smartphones will be a key revenue driver for SanDisk Corporation (NASDAQ:SNDK) and the overall industry. However, steady growth in cloud storage technology does present a threat for the industry. It is essential for investors to comprehend the key industry trends and company fundamentals to make the right investment choice.
According to the projections offered by Trefis, smartphones have witnessed a robust growth in NAND content. The number of smartphones sold globally reported a 40% year-on-year growth rate during the last 5 years. The demand of higher resolution pictures and high definition videos has exponentially risen with radical enhancements in media content. This underpins the growing demand for local storage capacity.
The increasing use of applications in smartphones has elevated the need for a higher storage capacity. The average capacity of flash memory in smartphones is expected to grow at around 20%-25% in the following years. Going forward, demand for smartphones will largely define the progress of the industry.
Quick snapshot of Sandisk’s first quarter results
SanDisk Corporation (NASDAQ:SNDK) announced its first quarter results recently. The company reported 11% growth in revenue, which is higher than the industry average of 10.4%. Growth in revenues led to a robust increase net income, resulting in a higher than expected earnings per share. Net income increased 45.3%, exceeding both the S&P 500 and average industry growth rate.
Furthermore, free cash flow also surpassed the industry average, which is indicative of a relatively higher equity valuation than its peers.
Why is Cloud storage technology threatening?
Cloud storage technologies enables users and businesses the suppleness to store data and access it at their convenience. Many believe cloud storage technology could pose a threat to the potential growth of flash memory consumption.
Cloud storage is a nascent technology, which is only capable of supporting local storage due to bandwidth limitations and highly expensive data transfers. As the demand for cloud usage grows, the demand for flash storage could decline drastically. Furthermore, the expected growth of 20%-25% in flash memory is relatively lower than historical growth rates due to cloud storage services such as iCloud and Dropbox.
However, It must be noted that cloud storage would need to be propped up by storage technologies that are much more advanced than traditional hard disks. Therefore, I don’t see cloud storage technology as a serious threat for SanDisk Corporation (NASDAQ:SNDK) in the long run.
Signs of growth in average selling prices
At present, the industry is suffering from excess supply. According to projections offered by Trefis, chip manufacturers increased production output in order to match the tremendous growth in smartphone sales and a possible shift in consumer preference towards ultrabooks.
However, expected growth in ultrabooks did not match initial estimates, leading to an oversupply in the NAND memory market. The excess supply coupled with the current macroeconomic environment and rapidly increasing competition further pulled down prices.
As a cost-cutting initiative, SanDisk Corporation (NASDAQ:SNDK) invested in next-generation process technology. At the macroeconomic front, there is growing optimism due to the reinstated balance in demand-supply ratio through massive reductions in production capacities.
Under the circumstance,s several small players were forced to shut down production facilities, which lead to market consolidation (Demand and Supply Equilibrium). Once the supply adequately balances itself to demand, I expect the average prices to resume historical patterns.
Competitive landscape in the industry
Micron Technology, Inc. (NASDAQ:MU) is one of SanDisk’s premiere competitors in the NAND flash storage market. It generates the highest percentage of its revenues from NAND Flash Memory at around 44%, which is followed by Core Dram Memory at around 39%. The remaining revenues are spread between NOR Flash Memory, Imaging, and Micro Display.