SanDisk Is In Trouble If Asian Growth Slows Further
SanDisk ( SNDK ) is a manufacturer of flash memory storage solutions such as memory cards, solid state drives (SSDs) and USBs. Most of these products fall in the consumer discretionary bucket, and their success largely depends on the health of the global economy. With mounting evidence that the growth in Asian countries is slowing, we think it could impact our price estimate SanDisk's stock, going forward.
In its latest 10-Q, the company reported that the Asia-Pacific (APAC) region makes up close to 62% of its total revenues. Giving credence to our concerns on Asia, SanDisk's APAC revenues declined 34.4% year-over-year "primarly due to decreased sales of embedded products and cards for mobile phones and tablets," as declared by the company. We think that SanDisk's heavy reliance on Asia can have an heavy downside impact on its revenues if growth continues to slow.
As mentioned above, SanDisk's product suite falls mainly under the consumer discretionary category. When things get tight or the outlook looks gloomy, consumers (especially in developing economies) are likely to cut purchases of high-end products such as smartphones and personal computers. Unfortunately, for SanDisk, its revenues depend heavily on these products; its mobile product segment makes up approximately 30% of its value.
If global phone demand tapers off as the APAC region slows in the next year or two, we could see the flash industry as a whole decrease the prices to appeal to more consumers. If industry prices decrease, SanDisk will have to follow suit or risk losing market share. Since costs will likely stay stable, we can expect the decrease in prices to cut into SanDisk's gross margins. Currently, we forecast that SanDisk's gross margins will remain flat at 40% over our forecast period but, if margins fall to around 30%, we could see a 10% downside to SanDisk's value.
A global slowdown, evidence for which is mounting, would be devastating for the flash industry. Since SanDisk has negligible pricing power in a highly competitive industry, we could see the company post poor Q3 2012 and FY 2012 results.
We currently have a $44 price estimate for SanDisk , which is approximately 5% higher than the current market price.