Chart of the Day – Floppy $SNDK

by Dan January 12, 2015 1:10 pm • Chart of the Day• Commentary

Prior to the opening Sandisk (SNDK) lowered Q4 sales and gross margin guidance:

The company estimates total revenue to be approximately $1.73 billion, lower than the previously forecasted revenue range of $1.80 billion to $1.85 billion. The lower revenue was primarily due to weaker than expected sales of retail and iNAND products.  Non-GAAP gross margin for the fourth fiscal quarter is expected to be approximately 45% compared to the previously guided range of 47% to 49%.

That’s about a 5% miss from their midpoint of their prior guidance.  The stock is down 14% today, quickly approaching their October lows as investors must be sniffing a Q1 and possibly full year 2015 guide down when the company officially reports on Jan 21st after the market close.

The two year chart below shows the 140% gains from the start of 2013 up until the company’s disappointing Q2 guidance in mid July that saw the shares crash 14% from the all time highs:

SNDK 2yr chart from Bloomberg
SNDK 2yr chart from Bloomberg

In the near term, from purely a technical standpoint $80 will be a fairly important spot.  For those that think forward guidance will be ok, then the stock at 12.5x 2015, with earnings still expected to grow 14% (for now) on sales growth of 11% is cheap, and $80 could signal a good entry for an oversold bounce.

It is important to note that SNDK traffics in one of the most commoditized components of the Smartphone and PC supply chain. Nand flash memory, and often times their volumes for customer embedded products like iPhone come at the expense of profitability (theirs) while augmenting Apple’s. Thus the gross margin decline.  Back in July I highlighted the gross margin decline in front of the expected product ramps (MorningWord 7/17/14: Flash Gored – $SNDK) suggesting:

Apple is a 20% revenue contributor, and as it ramps up production of new iOS devices that are sure to have greater storage needs, Apple will be displaying their legendary power to squeeze component suppliers on price.


Analysts are defending SNDK margin guidance, with many suggesting that they are overly pessimistic given the supply/demand environment for NAND in the second half of 2014.  Yet from where I sit, after a cyclical company like SNDK has enjoyed a fairly healthy margin rebound in the last two years, back to peak margins, it is probably worth taking the company’s guidance at face value

And then again in September (Name That Trade – $SNDK: Flash Forward):

Back in mid July, SNDK reported what looked to be a strong Q2 but a 3% point margin decline. (likely the result of aggressive pricing demands from Apple as they ramp production of many new products) Pricing pressure goes both ways, as a company like SNDK will have to give up a certain amount of profitability to secure a greater % of a coveted customer’s business (Apple is about a 20% revenue customer of SNDK).

Too bad I didn’t keep tabs on this one.  So many stocks to trade, so few hours in the day.

The other question is whether there’s a take-away for AAPL? Well, if you are an AAPL stock holder it’s great news that the company is squeezing the crap out of their suppliers. But I suspect the back half of 2014 could have been the ramp into mass production of 2 new iPhones and iPad Airs.  AAPL might have gotten a healthy benefit from the gap between 16 gb and 64 gb iPhones, as they did away with the 32gb version and are making a fairly incremental margin grab.  I have argued that this is exactly where Smartphone competitors could attempt to make a dent in AAPL’s profitability and compete on price, but for now, they appear to have a lock on the high end in the space, at least in North America.