In a markedly dramatic turn of events, shares of SanDisk (SNDK) jumped more than 13% during after-hours trading on Wednesday, with the rally continuing through Thursday. Prior to the announcement, SanDisk stock had been down nearly 45% year to date and 40% over the past year.
However, thanks to better-than-expected Q2 earnings and positive guidance for Q3 and FY2015, the Street seems to have taken a liking to SNDK again, at least for the time being.
Management reported EPS of 66 cents — doubling analyst estimates of 33 cents per share — and revenue of $1.24 billion, which was a decline of nearly 24% from the same quarter last year, but still ahead of estimates. Additionally, management announced a third-quarter dividend of 30 cents per share.
Why Has SanDisk Stock Struggled?
The SNDK roller coaster can be attributed to a number of factors, including revenue and profit misses and reduced demand for its products. In previous quarters, management also blamed supply issues and product qualification delays for lower-than-expected earnings.
Pitted against behemoth competitors such as Intel (INTC) and Samsung (SSNLF), delays of any kind have the potential to be detrimental, which is precisely what happened to SNDK and resulted in two consecutive quarters below analyst expectations.
Additionally, pricing pressure from heightened competition, particularly from Samsung — with its ability to get products to market nearly a year ahead of everybody else — has led to the loss of several key customers in recent years including Apple (AAPL) and Google (GOOGL, GOOG).
Is This the Beginning of an SNDK Turnaround?
Despite last week’s jump, SNDK stock is still down down 39% in 2015. Operating income dropped 75% over the second quarter of 2014, and free cash flow dropped from $197 million to negative $52 million.
Considering the dramatic decline of SanDisk stock, many investors are wondering if SNDK can recover. Could last week’s rally be the start of SNDK’s turnaround, or is this merely the Street’s knee-jerk reaction to the company’s earnings beat and hopeful guidance?
Of the 36 brokers providing recommendations to MarketWatch, 18 call SanDisk stock a hold and 13 call it a buy. From those same brokers, the average target price for SanDisk stock is $67.10, which equates to a potential upside of more than 8% from SNDK’s current share price of approximately $61.70.
What, though, would make SanDisk stock a buy?
According to CEO Sanjay Mehrotra, SNDK is in the process of developing market-leading products that “[bring] the best technologies and IP together from our various acquisitions.” Mehrtora described plans to ramp up market momentum within the next two years “once this converged architecture is introduced into volume production.”
For example, SNDK recently completed development of the CloudSpeed Eco Gen. II, a 2 TB solid state drive, which boasts greater storage density and triple the streaming bandwith of traditional hard drives.
Additionally, SanDisk has begun preparations for production of 48-layer 3D NAND memory chips. Management expects product samples to be ready in the second half of this year, and retail sales to begin at some point in 2016. If successful, the 48-layer 3D NAND product could rocket SNDK to the front of the pack, as competitors Intel (INTC), Micron (MU), and Samsung (SSNLF) are currently only able to produce 32-layer components.
But it will take more than a better memory chip to prevent SanDisk stock from slipping again.
Bottom Line for SanDisk Stock
Investor confidence is a fragile thing in the technology world, and when poor execution of the production process leads to sub-par revenue, and especially when management issues disappointing guidance, both shareholders and customers are often quick to jump ship.
However, SNDK CEO Sanjay Mehrotra has demonstrated a solid ability to maintain proper focus on the long-term future of the company. Despite previous setbacks related to supply and demand issues, SanDisk has the talent and resources to develop cutting-edge memory products.
As long as the production process issues have been resolved, SanDisk stock has the potential to once again become a force to be reckoned with in the computer memory arena. But it needs to substantially prove its mettle, first.
At this point, SNDK is a hold, and should remain so until its new line of cutting-edge 3D NAND chips hit the market.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.
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