No Flash in the Pan

 | Feb 07, 2013 | 1:00 PM EST  | Comments
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I skate to where the puck is going to be, not where it has been. --Wayne Gretzky

One of the keys to being a good investor is going where the market is headed, not where it has been. This is especially true when investing in technology stocks. A good example of this is the flash-memory market. A recent report estimates that hard-drive sales will decline 12% in 2013 as tablets and smartphones continue to eat into PC sales. Seagate (STX), one of main hard-drive makers, issued soft forward guidance in late January that foreshadows the industry's challenges.

On the other end of the spectrum, sales of flash memory used in smartphones, tablets and other mobile devices are predicted to increases 14% in 2013. This should provide a nice tailwind to one of the main flash memory makers, SanDisk (SNDK).

Seagate provides a much lower price-to-earnings ratio (4.5 vs. 29.7) than SanDisk and pays a 4.5% dividend, which the flash-memory maker doesn't. But I would rather own SanDisk, as the company has much better growth prospects and has had recent catalysts, including:

  • Its products were recently included in the iPhone 5. It was the first time a SanDisk design was incorporated into the iPhone. Flash memory is the second-highest-priced component in the iPhone 5.
  • Apple (AAPL) is trying to lessen its dependence on supplier Samsung, which is a primary competitor in the smartphone market. This should bode well long term for SanDisk.
  • Flash memory pricing erosion is improving, as manufacturers have been more prudent in expanding capacity recently.
  • It is growing its solid-state drive products, and the company estimates this could be as much as 25% of revenue by 2014.
  • Needham upgraded shares to Buy from Hold two weeks ago.
  • SanDisk should be able to cut manufacturing costs by As much as 20% in 2013.

Four reasons SanDisk provides growth for a reasonable price at $50 a share:

  1. The stock is more reasonably priced from a forward PE (12.6) perspective, which is a discount to its five-year average (16.1).
  2. The company has crushed earnings estimates the last three quarters as the flash-memory pricing cycle has improved.
  3. Analysts expect approximately 10% revenue growth in both 2013 and 2014. The stock also sports a low five-year projected PEG of 0.59.
  4. SanDisk has a solid balance sheet with more than $1 billion of net cash on the books (approximately 10% of current market capitalization).

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