Here's How Western Digital Can Win From SanDisk's Client SSD Business

One of the concerns for investors when Western Digital Corp WDC agreed to buy SanDisk Corporation SNDK was whether the solid-state drives (SSDs) of SanDisk would eat into the sales of Western Digital's hard disk drives (HDDs).

SSDs provide substantial benefits over traditional hard drives in the form of faster booting, durability, reliability and energy-efficiency. Such benefits from SSDs could cannibalize Western Digital's hard drive sales.

But, Susquehanna analyst Mehdi Hosseini said Western Digital will benefit from the cannibalization of client HDDs by client SSDs post the merger.

Related Link: What The Street Is Saying About Western Digital Following Earnings

"It's not a 'Zero-Sum' game. Client SSDs carry a more favorable Rev/unit, GM percent, and OM percent profile than Client HDDs. Our work suggests Rev/unit increase of ~$35/unit as Client HDD is replaced by SSD, with Op Profit increase/unit of ~$10/unit. This is driven by our assumption that Client SSD Gross Margins are 30 percent (vs. Client HDD GM of 20 percent)," the analyst noted.

As such, upon acquiring SanDisk, Western Digital will actually transition from playing client HDD defense to playing client SSD offense. The company would be able to de-risk client SSD cannibalization of HDDs – and perhaps even benefit from it.

Looking Ever Further Into The Future

Moving into fiscal 2017, the analyst sees average client SSD capacities moving to 500 GB, while HDD capacities grow moderately to 950 GB, which would result in an incremental revenue of about $61 per drive, and operating income of about $14 per drive. In other words, WDC can actually be able to accelerate penetration in a profitable way.

"Given the longstanding OEM relationships, we believe WDC would be able to generate meaningful synergies in SG&A and R&D between SNDK's Client SSD business and WDC's Client HDD business, further enhancing the value proposition of further supporting the cannibalization of Client HDD by SSD, rather than falling prey to it," said Hosseini who has a Positive rating on Western Digital.

In October 2015, Western Digital agreed to buy SanDisk in a $19 billion deal to boost its flash memory technology, which is widely used in smartphones and tablets. Recently, the European Commission cleared the deal after concluding that the acquisition would not harm competition in the data storage market in Europe.

Shares of Western Digital have dropped 45 percent since it announced the acquisition of SanDisk. They have been trading between $38.64 and $111.84 during the past one year.