SanDisk, Please Don't Let Me Be Misunderstood

Q - Bob Gujavarty: Yeah, thanks for taking my question. I mean, my question's a little bit more strategic I guess, in that – I mean, if I look at what you've done on a revenue basis, I mean, if I look at five-year CAGR from kind of 2007 through 2012 now based on the new guidance, your revenues actually have undergrown Intel by a significant amount, and I don't think most investors would consider Intel a growth company. So I was just curious if you have rethought your company as more of a traditional semi company that focuses on cash returns, dividends and stock buybacks, because it doesn't appear you've been very successful in terms of growing the top line.

In my humble opinion, the answer would be a resounding “yes,” were it not for SSDs.  Commodity players, such as flash memory manufacturers, are eminently uninvestable.  I said as much when my adventure with SanDisk began more than two years ago. (See Tech Sector: NAND Flash Memory Is Changing, So Which Names Should You Play?)  But despite having wasted 18 months watching SanDisk stock move up and down (SanDisk's stock price is almost exactly where it was in November 2010), the SSD opportunity -- the catalyst and only reason why I’m messing with SanDisk, OCZ Technologies OCZ, STEC (NASDAQ: STEC), and Fusion-io (NYSE: FIO) (if it ever trades down in the teens) -- has continued to develop even faster and bigger than most had anticipated. 
 
Let me stick whatever is left of my neck out: SSDs will change computing in the same way the shift from dial-up to broadband changed the Internet.  And that shift -- for all intents and purposes -- has not even started yet. Aside from the cool factor of nearly “instant on” machines, enterprise SSDs can completely change the way data centers and users manage and distribute data, with cost savings up and down the food chain.  
 
Industry estimates are that by 2015 the size of the combined retail, enterprise, and tablet SSD markets alone will be about $22 billion; that’s just a bit less than the entire NAND market is today. (See SanDisk's Analyst Day presentation, page 47)   And those estimates are going up every quarter. Just consider that only last July IDC forecasted that total enterprise storage spending (HDD, SSD, etc.) for 2014 would amount to $22 billion.  A year later, that figure applies just to the SSD market by 2015.  Or look at it this way: Seagate (NYSE: STX) and Western Digital (NYSE: WDC) 2014 combined revenue estimates are $33 billion; let’s assume it grows to $35 billion by 2015.  If just 50% of the storage market has migrated to SSDs, the SSD storage business earmarked for just two suppliers would amount to $17.5 billion. 
 
Of course, SanDisk isn’t going to be the only player in town, so let’s assume it garners only 15% of the estimated $22 billion SSD market (vs. its current NAND market share of about 30%).  That is equivalent to about $3.3 billion, or about 38% of SanDisk estimated revenues, and not far from SanDisk's 25% target for 2014.  In that scenario, SanDisk will grow revenues 70% over the next four years, even if it is assumed that all its other markets remain flat to 2012 revenues.  Not very likely.
 
I know I’m throwing around a whole lot of big numbers and there are dozens of moving parts to this story.  But the point is that this is a huge story.  And I won’t even get into the gross margin advantages for SSD products once you factor in the software-heavy solutions embedded into the drives.
 
If you don’t subscribe to the SSD thesis, stay away from SanDisk.  SanDisk might be tradable in the mid-30s, but it is not investable.  But if you do believe in the SSD opportunity, then SanDisk at these prices is a gift because few (if any) companies have the vertical integration, software know-how, and patents to supply SSD demand across all platforms.
 
Enough cheerleading.  In non-SanDisk-related news:

• Akamai AKAM reports tonight and I am positioned for a largish move either way.  The stock has been very strong the last week or so and expectations have been pumped up.  If Akamai tells us that the Q4 strength is now a trend and that their wireless project with Ericsson may soon start turning into revenues, we may get another strong leg up.  If not, low $30s here I come.  I have a tough time seeing a scenario that would support the status quo.

• Bad, bad behavior by Procera Networks PKT in bringing its secondary offering to market.  First the company issued a bunch of press releases about how great business is; then it finalized the S-1; and on the night Procera Networks priced the deal (at $21), it jacked up the shares issued by one million. The stock hardly held $21 the first day and is now trading at $20.  I have no beef with how Procera Networks’ business is doing, but management may want to take note that this is not how business is done.

• And lastly, a “lottery ticket” idea: Some good eyes on a trading desk spotted the Pepsi PEP Jun 70 calls trading for about $0.15 and 11.3 vol.  I went long on those and I’m trading the stock around them.

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