Why Shares of SanDisk Have Doubled

SanDisk's stock has doubled over the last five months from about $20 in December to nearly $40 today. Here's why.
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NEW YORK (TheStreet) -- SanDisk (SNDK) , which competes with Intel (INTC) - Get Report and Micron (MU) - Get Report in flash memory cards, reported a strong improvement in flash memory gross margins for the first quarter of 2010. Higher gross margins can be attributed to better-than-expected memory card sales, reductions in manufacturing costs and a strong flash memory pricing environment. Due in part to these factors, SanDisk's stock has doubled over the last five months from about $20 in December to nearly $40 today.

Higher Gross Margin Expectations Leads to Boost in Stock

Led by strong first-quarter performance, SanDisk has raised its product gross margin guidance to 35-38% for the calendar year 2010, up from its earlier guidance of 27-33%.

In line with the company's guidance and based on continued positive expectations for SanDisk's flash memory business, we have increased our estimate for

SanDisk's mobile flash memory margins

from 28% to 35% for 2010 and beyond. As a result of this and other updates to our SanDisk analysis, the Trefis price estimate for SanDisk's stock has increased from $30 to $44.

So what has led to higher profit margins for SanDisk's flash memory cards?

1. Strong demand for flash memory cards among mobile phone makers

SanDisk reported strong adoption of its high capacity iNAND flash memory among smartphone makers. SanDisk's iNAND series, designed specifically for advanced multimedia handsets, is a high-capacity embedded flash drive that allows designers to provide more memory for greater multimedia functionality.

As a result of the surge in flash demand from device manufacturers, SanDisk was able to offset the negative impact of typical first-quarter seasonal declines in its retail (end consumer) sales. Going forward, we expect growing smartphone sales to drive demand for iNAND among mobile vendors.

2. Strong demand has led to better pricing environment

Due to favorable supply and demand environment during the first quarter, SanDisk saw

price per Gigabyte (GB) of memory

decline only 7% sequentially, which was less than the company's prior expectations.

We have increased our 2010 forecast for SanDisk's Price per Gigabyte of Flash Memory to $0.94, up from our previous estimate of $0.78. We also now expect pricing to reach $0.10 per GB by the end of up forecast period, up from our prior forecast of $0.08 per GB.

3. Ramp-up of 3-bit-per-cell technology drives down manufacturing costs

Flash memory based on 3-bit-per-cell technology (32-nanometer node) constituted more than 50% of total memory sales in the first quarter of 2010. Sales of this type of memory, which is cheaper to produce, helped SanDisk register a 14% sequential decline in production cost per GB of memory.

SanDisk expects strong sales for 3-bit-per-cell memory products to continue through 2010, and forecasts a 40% decline in its production cost per GB from 2009 to 2010.

You can modify our forecast above to see how SanDisk's stock price is impacted if its flash memory gross margins do not rise as soon as we forecast.For additional analysis and forecasts, here is our

complete model for SanDisk's stock.

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