• SanDisk shares have been lately rallying strongly on the back of several positive industry trends.
• Although SanDisk will take several quarters to outgrow its revenue woes, the bad news has already been baked into the SanDisk stock price.
• SanDisk's enterprise SSD segment is growing at a healthy clip and has good potential to pull the company out of its revenue tailspin.
• Now might be a good time to buy SanDisk shares.

Image License - Flickr

A number of positive industry trends have conspired to take shares of NAND flash manufacturer SanDisk (NASDAQ:SNDK) higher over the past one week. SanDisk shares are up more than 17% over the past five days after three consecutive pieces of good news in the memory industry: Western Digital announcing that China’s Unis was set to acquire a 15% stake in the company at a 33% premium; Morgan Stanley raised SanDisk’s rating to Overweight from Equal Weight, and Micron (NASDAQ:MU) delivered better-than-feared Q4 FY 2015 results. Despite the impressive gains, SanDisk shares are still down 39% YTD.

SanDisk stock price performance YTD

Source: SanDisk stock price data by amigobulls.com

SanDisk’s woes started when the company delivered weak Q1 FY 2015 results and proceeded to issue weak guidance. SanDisk blamed the poor outlook on loss of a key customer contract, which many analysts believe was Apple (NASDAQ:AAPL) due to a poor product mix. Some analysts believe that Apple opted to source its iPhone 6S SSDs from Samsung because it decided to use 2GB mobile DRAMs that utilize LPDDR4 which is Samsung’s main specialty. Apple has been sourcing more mobile DRAM from Samsung in order to secure future NAND supplies. The analysts also pointed out that SanDisk’s built-in thermal sensors for MacAir SSDs were faulty.

SanDisk’s current woes are, however, largely near-term issues that the company is likely to soon overcome.

SSDs are a Long-Term opportunity for SanDisk

Investors have remained alarmed that most of SanDisk’s businesses seem to be disintegrating. During the first half of the current year, the company’s net revenue fell nearly 20% Y/Y to $2.57 billion. Embedded storage revenue was down 6%, removable storage declined 16% while the company’s ‘‘Other’’ segment reported an 18% contraction in revenue. Meanwhile, SSD segment on which SanDisk is pinning its hope for a recovery was a mixed bag with client SSD revenue falling a massive 55% Y/Y to $308 million while enterprise SSD revenue grew a healthy 64% Y/Y to $360 million.

Enterprise SSDs therefore remain the best hope of recovery for SanDisk. Although revenue from the segment accounts for 14% of revenue, there are a couple of good reasons to believe that the segment has ample momentum to eventually grow to a level where it will be able to completely offset declines in the company’s other segments.

The first positive trend is the rapid shift by enterprises from low-grade SATA SSDs to high-end PCIe storage. SanDisk has a significant exposure to the rapidly growing PCIe SSD storage market courtesy of Fusion-io, which the company acquired in 2014. PCIe SSDs offer a very compelling price/performance value proposition compared to SATA hard drives and low-end SSDs. For instance, SanDisk’s CloudSpeed Ultra Gen II SSD costs 4 cents per IOPS compared to $3.50 per IOPS for SATA hard drives.

SanDisk recently moved to get a proper foothold into the exploding all-flash arrays market. Although SanDisk makes and sells flash products, the company does not manufacture flash arrays directly but rather has been content to sell SSDs to flash manufactures. But the company recently changed its approach when it unveiled its InfiniFlash all-flash arrays series with 512TB that is perfectly cut out for the enterprise. The array’s pricing of <$1/GB makes it one of the cheapest all-flash arrays product in the market and improves its chances of gaining strong traction. SanDisk owns its own foundries unlike all-flash players such as Pure Storage and EMC (NYSE:EMC), which gives the company a distinctive price advantage through lowered manufacturing costs. Moreover SanDisk has plenty of engineering and technical know-how to stack large amounts of storage into a single controller using space-efficient designs which gives the company a good head start over competitors.

Bottom Line

SanDisk currently owns about 12% of the enterprise SSD market. The company’s expertise in making enterprise-grade SSD products is, however, proving to be incisive in helping the company progressively steal market share from rivals. While SanDisk will require at least 4-6 quarters to completely offset its revenue decline, it appears as if all the bad news has already been baked into the SanDisk stock price. As Morgan Stanley aptly remarked when dishing out the SanDisk upgrade, SanDisk shares currently have limited downside. That’s the reason why SanDisk shares have been rallying strongly of late. The SanDisk stock price has likely hit the bottom and now might be a good time to buy.