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Morgan Stanley Downgrades Sandisk, Says Headwinds Are 'Intensifying'

Morgan Stanley Downgrades Sandisk, Says Headwinds Are 'Intensifying'
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In a report published Monday, Morgan Stanley analyst Joseph Moore downgraded the rating on SanDisk Corporation (NASDAQ: SNDK) from Overweight to Equal-weight, while lowering the price target from $80 to $75. While there appears to be limited downside to the shares, the analyst expects the company to experience some margin pressure in the short term.

"With share loss in SSD and embedded, we think the company is losing end market flexibility, and will have to move to lower margin exposures in the short run. We do think the stock offers value, and see limited downside, but are stepping to the sidelines while the company regains market traction," Moore explained.

Although there has been significant NAND improvement over the past three quarters, the company's earnings have been weak, driven by issues in its enterprise strategy and execution challenges at Apple, Inc. (NASDAQ: AAPL), SanDisk's largest customer.

"We continue to like Sandisk's underlying technology leadership, the company's strategy to move slowly with 3D NAND and the fact that the stock price trades below the replacement value of the fabs (plus cash and royalty value)," the Morgan Stanley report stated.

The analyst believes that it would be difficult for SanDisk to recover the SSD share lost at Apple, especially due to limited penetration outside of Apple. In addition, Apple is unlikely to take SanDisk back mid product cycle. The analyst expects this to drive SanDisk to look at lower margin options.

According to the analyst, the three challenges facing the company at present include robust state drives, smartphones and enterprise. "We're quite surprised that so many challenges mounted so quickly, but in total, they are going to force the company to pursue less profitable opportunities," Moore added.

Latest Ratings for SNDK

Mar 2016SusquehannaDowngradesPositiveNeutral
Mar 2016CitigroupMaintainsNeutral
Mar 2016CitigroupDowngradesBuyNeutral

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