SanDisk Is a Winner and It's Just Getting Started

NEW YORK (TheStreet) – SanDisk (SNDK) investors have made a lot of money. That's the most understated way I can put it. The stock is up nearly 50% for the year to date and 175% over the past two years.

Given that shares have soared more than 500% over the past five years, investors are faced with the decision of when to cash out. It's a problem market participants everywhere wish they had. The stock closed Monday at $105.59, only percentage points away from a new 52-week high.

Although trigger fingers are inchy, it would be foolish to abandon a winner like SanDisk, especially before management completes the company's transition into the enterprise.

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SanDisk's recent $1.1 billion all-cash deal for Fusion-io (FIO) positions the company on an accelerated path to become the name in enterprise SSD storage (solid-state drive), surpassing the likes of Seagate (STX) and Western Digital (WD)

Like Seagate and Western Digital, SanDisk has avoided a complete collapse of the hard disk market. As Big Data titans EMC (EMC) and NetApp (NTAP) have proven, growth in enterprise storage can be lucrative. That and SanDisk's exposure to the gaming industry, which has adopted the SSD standard, will prove highly profitable.

By 2016, the total addressable market for enterprise SSDs will grow to more than $8 billion, more than doubling the current market. All of this supports a $130 stock price in the next 12 to 18 months when factoring Fusion-io's accretive potential for double-digit earnings-per-share starting in 2015.

That enterprise SSD will grow to $8 billion is only one bullish factor. SanDisk's long-term vision of how the data center will change is the larger objective. SanDisk wants to emerge as a leader in the flash-transformed data center. This transformation will help customers like Apple and Facebook better manage their heavy data workloads.

When that market fully takes shape, SanDisk, which has a strong global scale, will have enough leverage to compete with market incumbents like EMC and NetApp. It will be able to grow its revenue in ways that that it would have taken Fusion-io decades to do without the deal.

To that end, I believe Wall Street is discounting Fusion-io's strong position with customers like Facebook (FB) and Apple (AAPL), which contribute more than 60% of Fusion-io's total revenue.

When you factor in a large customer like Hewlett-Packard (HPQ), SanDisk management, for only 17% of its net cash balance, has acquired a strong revenue base for many years to come.

Micron (MU), which has been on a shopping spree of its own as demand for flash memory grows, is not going to make that easy. But no market worth pursuing should be, especially when there's money to made.

The good news is SanDisk is well-positioned (as any other company) to secure a significant chunk of the flash-transformed enterprise market. Even on the most bearish assumptions, any drop in prices in its core NAND flash memory business can now be offset by a shift towards higher-value/higher-margin enterprise revenues.

At the time of publication, the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates SANDISK CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate SANDISK CORP (SNDK) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.4%. Since the same quarter one year prior, revenues rose by 12.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although SNDK's debt-to-equity ratio of 0.28 is very low, it is currently higher than that of the industry average. To add to this, SNDK has a quick ratio of 1.89, which demonstrates the ability of the company to cover short-term liquidity needs.
  • SANDISK CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, SANDISK CORP increased its bottom line by earning $4.37 versus $1.69 in the prior year. This year, the market expects an improvement in earnings ($6.04 versus $4.37).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Computers & Peripherals industry. The net income increased by 61.8% when compared to the same quarter one year prior, rising from $166.23 million to $268.95 million.
  • The gross profit margin for SANDISK CORP is rather high; currently it is at 54.96%. It has increased significantly from the same period last year. Regardless of the strong results of the gross profit margin, the net profit margin of 17.78% trails the industry average.

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