Feeble 1Q Outlook for SanDisk

Zacks Equity Research

After reporting mixed fourth quarter results, SanDisk Corp. (SNDK) lowered its outlook for the first quarter of 2012 based on a soft demand scenario.

The company expects to earn $1.2 billion in the first quarter of 2012, lower than the previous guidance of $1.30 billion to $1.35 billion. The leading memory chip maker for smartphones and tablets also expects its gross margin to be lower than the previous guidance.

Management expects that the weak pricing environment to impact demand. Separately, another company Micron is of the opinion that NAND bit supply growth should be in the 65%-70% range for 2012, which would balance the supply/demand situation in the second half of 2012. Therefore, the pricing environment may be expected to improve at that time.

Moreover, several fast-growing markets, such as client and consumer PCs, smartphones and tablets, are using more NAND memory. Additionally, the yet-to-take-off ultrabooks will also use more NAND. These factors are expected to be beneficial for SanDisk..

Moreover, SanDisk announced at its analyst day that it expects contribution from the SSD business to grow roughly 14.0% in 2014. The acquisition of FlashSoft and the licensing agreement with Diskeeper highlights SanDisk’s commitment to further expand in the SSD segment. OEM customers can manufacture Ultrabooks and other ultra-thin devices that enhance user experience with faster responsiveness and better performance.

SanDisk reported mixed numbers in the fourth quarter of 2011 with the top line surpassing the Zacks Consensus Estimate, but earnings missing. Both OEM and retail sides of the business progressed, enabling solid product revenue.

Overall revenue growth was encouraging and management confirmed that the demand for its products will sustain the momentum going forward. However, the first quarter guidance was weak, owing to demand uncertainty from the smartphone makers. But we believe that the issue will have a short-term effect on the figures.

Though near-term visibility, memory price declines, lackluster PC sales, European issues and currency fluctuations are headwinds; we expect a turnaround story in the second half of the year based on growing demand for NAND flash.

Currently, SanDisk holds a Zacks #4 Rank, which implies a short-term Sell rating.

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