Friday, 22 August 2014

Why Sandisk is a Top Technology Pick

There are many reasons why I feel US semiconductor maker SanDisk (SNDK on Nasdaq) is one of my favourite Technology stocks of the moment. 

This is an interesting turnaround, because several years ago I was in fact an actual bear of the stock due to its very high valuation. These days, I am a big fan of the company and the stock for 7 key reasons:

1. Well-Positioned Thematically

Sandisk is a key technology company exposed to some of my favourite long-term investment themes - The Internet of Things, the Mobile Internet and Big Data. 

2. Wide Moat

Sandisk is a leading NAND flash memory maker, the type of memory used in USB drives, smartphones, tablet computers and solid state hard drives. This type of storage is more expensive per gigabyte than a traditional mechanical hard drive (of the sort found in desktop PCs), but has the advantage of consuming far less power (important for mobile computing), having much fast data retrieval times and also being more robust (mechanical hard drives are typically very sensitive to shocks and extreme temperatures). 

Sandisk spends a heavy 12% of sales on Research & Development, which over time has led to the building of an extensive portfolio of valuable patents, which Sandisk monetises in the form of royalty payments received from other semiconductor makers who use their designs and technologies. This, combined with Sandisk's focus on higher-end NAND flash memory applications has allowed the company to maintain gross margins well north of 50%, over 10% better than their memory maker rivals such as Toshiba and Micron, and currently as high as 53%. 

3. Strong Free Cash Flow

This high profit margin is converted in to bundles of cash, with between $1.4-1.6bn of net free cash flow generated per year over each of the last two years. With $4.2bn of net cash already on the balance sheet, this equates to a 8-10% free cash flow yield on Sandisk's enterprise value. Even with the drag of this cash pile on profitability, Sandisk is still achieving a Return on Equity not far shy of 15%. 

4. Valuation is attractive

An ex-cash 2015e P/E of under 12x and EV/EBIT ratio of 7.8x is cheap for such an innovative growth company, which is also paying a steadily rising dividend (1.1% yield) and which is also buying back shares (Sandisk is a member of the Powershares Buyback Achievers portfolio, for instance). 

5. Profit momentum is positive

Despite continued deflationary pressures in terms of $ per gigabyte of NAND flash storage, the drive to lower manufacturing costs and also the surge in volume demand is leading to upwards revisions to both sales and earnings forecasts (the company's consensus 2015e EPS forecast is over 10% higher today than it was at the start of 2014).

6. Leading sell-side analysts are positive

The average consensus target price is $114 (vs. $97.55 now), while leading brokers such as Sanford Bernstein have a very bullish $150 target. 

7. Positive Technical Analysis

SanDisk (NSQ:SNDK) trades at $97.55 at present, while there is an upside price gap to fill on the share chart at $105.80, giving clear upside in the short-term. There is also a solid upwards price trend, in place since mid-2012. 

All in all, I see a good number of reasons to be a buyer of SanDisk (SNDK) today, although as always, you are advised to Do Your Own Research!


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1 comment:

  1. Sandisk is actually a well known brand in electronics and peripherals. I purchased Pen drives from Sandisk, it comes with secure system.