Inside Wall Street: A Brighter Future for Memory-Maker SanDisk?

Haste makes waste. This happens often enough in the stock market.

When SanDisk (SNDK) came out on Jan. 28 with its first-quarter 2010 sales forecast, plenty of investors rushed to sell the stock of the world's largest supplier of flash memory storage cards. Some analysts had expected higher numbers than SanDisk's guidance. So panic ensued, driving the stock down from $28 a share to $25.41 that one day.Big mistake for the sellers. The stock started bumping up the very next day, and it closed at $29.13 on Feb. 19. Some SanDisk watchers believe the stock could strike nearly $40 in 12 months. The lesson here is look before you leap.

SanDisk designs and makes those ubiquitous memory cards used in all manner of consumer electronics, including cell phones, digital cameras, camcorders and laptops. They're also used in gaming devices and MP3 players. Flash memory technology is essential to these devices because it allows data to be stored in a safe and compact format that retains information even after the power is turned off.

New Products Mean More Demand

The bears expect demand for these products to remain weak and uncertain over the next few quarters. But others who are positive on a sales upturn in the second half of the year argue that new tech products, such as Apple's iPad tablet computer and new smartphones will spark rising sales of SanDisk's flash memory products. A "powerful adoption cycle is under way" for SanDisk's cards, says Alex Gauna, tech analyst at JMP Securities (which has done banking for the company), who rates the stock outperform.

He says SanDisk is "accumulating a good proportion of design wins" in both the smartphone and solid-state drives (SSD) -- a high-speed, high-capacity storage system for corporations -- markets that should sustain demand and earnings growth.

SanDisk will be a "key beneficiary" of solid-state drives for enterprise use and tablet PCs in the second half of 2010, says Atif Malik, analyst at Morgan Stanley (which owns shares and has done banking for the company). The analyst upgraded the stock to overweight from equal weight on Feb. 17, with a price target of $37 a share. These products alone will generate 10% to 15% of incremental demand. That's in addition to new smartphones, which are likely to be the primary source of demand, says Malik. The accelerating popularity of smartphones and solid-state drives sets the stage for an increase in gross margins at SanDisk, he adds.

Generally Upbeat

The stock's valuation looks attractive, the analyst says. It's trading at about nine times Morgan Stanley's 2010 earnings estimate of $3.10 a share, which is significantly below its five-year range of 12 to 25 times. For 2011, Malik sees earnings leaping to $3.90 a share. SanDisk earned $1.85 in 2009. Malik considers management's sales guidance for 2010 conservative, which "will likely result in positive estimate revisions over the next several quarters." SanDisk forecasts revenues of $4 billion to $4.4 billion for 2010, while Morgan Stanley expects $4.7 billion. For 2011, Morgan Stanley projects revenues of $6 billion, way above consensus analysts' estimate of $4.8 billion.

With the bulls confident that tech innovation should help boost demand for SanDisk's products, Wall Street remains generally upbeat on the stock, with 11 of 20 analysts recommending buying it, and three rating it a sell. Six analysts have yet to get off the fence and are staying neutral.

Some large institutional investors have been buying shares, including Fidelity Management, which purchased 4.4 million shares as of Dec. 31, 2009, raising its stake to 12%; and Wellington Management, which bought 10.8 million shares and currenty owns a 7.6% interest. If they're on the money, this stock won't be a flash in the pan. .
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