Should Apple Buy SanDisk?

NEW YORK (TheStreet) -- Apple (AAPL) had quite a newsworthy week last week, reporting fourth-quarter earnings and then holding a press conference in which they unveiled their newest laptop, an upgrade of the super-thin MacBook Air that uses flash memory in lieu of a traditional hard disk drive.

On the company's conference call, a common question came up: What is the company planning to do with its more than $51 billion in cash and investments? Here's what CEO Steve Jobs said on the matter:

"We strongly believe that one or more very strategic opportunities may come along that we're in a unique position to take advantage of because of our strong cash position."

The question this naturally begs is: What opportunities could Apple pursue that would be meaningful to the company? One company on the Magic Formula Investing screens came to mind: flash memory vendor SanDisk (SNDK).

There are reasons why an Apple-SanDisk tie-up could make sense. It's financially feasible as SanDisk's enterprise value is about $7.7 billion -- even a 50% premium would cost only $12 billion, well within Apple's means. It is far from unheard of for an OEM to control some of their component supply. Samsung is the world's largest memory maker and one of the largest makers of mobile processors, but also has sizable market shares in televisions, Blu-Ray players, and mobile phones. Toshiba and Sony (SNE) also manufacture many of their own components.

The strategic advantages for Apple are two-fold. Apple's ground-breaking designs in mobile phones, tablet computers, and now in notebook computers makes flash memory the company's single most important component. In lowest price configurations, flash accounts for about 14% of the iPhone 4's cost, 11% of iPad materials, 33% of the new touch-screen iPod nano, 23% of the new AppleTV, and presumably a significant amount of cost for the new MacBook Air. It is just a matter of time before Apple's entire notebook line moves to flash storage (Jobs effectively hinted this at the Air's unveiling). Additionally, as storage capacity goes up, flash becomes even a larger percentage of cost (e.g. 34% of the cost of the 64GB iPad). Reports vary, but it seems possible that Apple could be responsible for as much as 10% of worldwide flash memory consumption.

SanDisk's product gross margins are generally in the 30-40% range, meaning that Apple could conceivably secure their most important component at a significantly lower cost than competitors. The company has already shown the strategy of entering new markets at aggressive prices to shut out competition. A lower cost structure for producing these evolving new computing form factors is a significant competitive advantage.

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