Here's an early draft of the article, let me know what you think. Thanks. -Tae
SanDisk (SNDK) Overview – August 25, 2000
Written by Tae Kim - TigerInvestor.com Article
Company Information
SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Santa Clara County
United States
Tel: 408-542-0500 Fax: 408-542-0503
sandisk.com
Employees: 800
Stock Price (8/24/00): $81.75
Market Capitalization: $5.5 Billion
P/E Ratio (Operations): 105
52 Week Performance: +92.4%
Daily Volume: 2.6 Million
Overview
Sandisk is the world’s largest supplier of flash-memory storage products. The company designs, develops and markets several product lines used in a wide variety of electronic devices including digital cameras, laptops, cell-phones, PDAs, MP3 players, audio recorders and digital video cameras. The company was founded in 1988 by Dr. Eli Harari, who is a noted innovator and patent-holder in non-volatile memory technology.
In 1999 the company sold over 5 million product units under its own name and notable OEMs which include Canon, Cisco, Hewlett-Packard, Kodak, Lucent, Motorola, Nokia and Panasonic. This year according to News.com, the company is on track to produce 15 million units.
As the market leader, Sandisk played a key role in setting the major standards in the industry and was the first to produce flash cards, CompactFlash cards and removable MMC cards. According to the company, Sandisk has a 28% market-share in the flash memory market.
Sandisk holds over 100 key U.S. patents on flash memory and many more pending. Consequently the company has lucrative cross-licensing agreements with Intel, Sharp, Hitachi, Samsung, Toshiba, Silicon Storage Technology and TDK.
Until recently the company was a “fab-less”, relying on outsourcing manufacturing to Taiwan's United Microelectronics. However the company is starting to invest in fab plants through partnerships with Toshiba and Tower Semiconductor to guarantee future flash memory supply and production.
Opportunity
Dr. Harari at the recent shareholder’s meeting in early May of 2000 characterized flash memory as a “Tornado”, the symbol Geoffrey Moore used in his book The Gorilla Game for truly disruptive technologies.
The three major trends he mentioned were:
1) Flash memory forcing the obsolescence of traditional 35mm film
2) Flash memory replacing 8mm as the media of choice for digital video cameras
3) Flash memory replacing CDs and Minidiscs for music storage
Flash memory excels in mobile applications where the key characteristics of durability, form factor and power consumption conservation are critical. According to recent independent market forecasts on CNET, the market for flash memory was $2.5 billion in 1998, $4.5 billion in 1999 and is expected to grow to $10 billion this year.
Personal Primary Research
Two months ago I bought a Fuji MX1200 digital camera, which uses SanDisk flash memory cards. Along with the camera I added a 32 megabyte card and a Sandisk USB card reader. I simply love it and have taken hundreds of pictures on it thus far. The spacious card let’s me take 50 high resolution pictures and upload them onto my PC faster than you can say “flash memory.” True plug and play and a breeze to use. The combination of flash memory and new mobile digital applications is revolutionary.
The USB reader works so well that the “postage stamp” 3-gram 32 megabyte card can replace the old Iomega zip drive as the removable media of choice. Moreover as the standard, the Sandisk card is usable and interchangeable with the flash memory slot on my Diamond Rio500 MP3 player.
Product Lines
The company produces five major product lines, which are available in over 20,000 retail outlets.
1) CompactFlash (CF) – up to 192 megabytes in capacity and is compatible with PCMCIA Type II slots using an adaptor card. Common in digital cameras, handheld PCs, Mp3 players and PDAs, audio recorders. As the standard, 160 member companies are in the CompactFlash Association
2) PC Cards – PCMCIA storage cards available in capacities up to 1.2-1.6 gigabytes
3) MultiMediaCard (MMC) – the world’s smallest solid state storage device. Weighs an incredible 2 grams and is the size of a small postage stamp. Common in mobile phones, digital video cameras. There are 75 companies in the MMC association
4) IDE Flash Drive – available in capacities of 32 megabyte to 1.2 gigabytes. Fits in the traditional IDE hard drive connector
5) Secure Digital Card – similar to MMC cards, but provides digital copyright protection for intellectual property. 90 companies have joined the SD association
Partnerships & Recent News
August 24, 2000 – Nintendo announces their next generation video game console with incorporate a SD-slot for Sandisk 64MB flash memory cards
August 16, 2000 – Compaq is use Sandisk MMC cards in their new iPaq PA-1 MP3 player
August 14, 2000 – Nike to use Sandisk MMC cards in PSA Play 120 MP3 player
July 4, 2000 – Sandisk announced $75 million strategic investment in Tower Semiconductor to help build a new Israeli fab
June 27, 2000 – Palm announces it will include a Sandisk Secure Digital card slot in future 2001 PDA models. Palm has 65% marketshare in PDAs, a market expected to sell 2.6 million units in 2000
May 9, 2000 – Sandisk and Toshiba form a joint-venture called FlashVision, which will renovate a flash memory fab in Virginia. The plant will start producing chips in late 2001 and is expected to hit $1 billion in annual sales in 2002
Financial Performance
Second Quarter 2000 – Ending June 30, 2000
· $143 million in total revenue. Up 174% from a year ago
· Product revenue was $122.6 million. Up 190% from a year ago
· Licensing and Royalty revenue was $21.4 million. Up 109% from a year ago
· Net income was $24.4 million. Up 326% from a year ago
· Earnings came in at $0.33 per share, beating analyst estimates by 50%
Conference Call with CEO Eli Harari
· Record bookings, overwhelmed by demand, tremendous order backlog to Q1 2001
· Gross margins improved form 31% to 30% this quarter. Margin guidance for ½ to 1 point improvement in both Q3 and Q4
· The market is tremendously supply constrained. Expects a benign, stable pricing environment
· Expects more capacity to come online due to process wafer shrinks and new fabs
· CompactFlash 43% of revenue, MMC 22%, Flash Disk 18%, Flash chip-set 5%
· No real competition. Only Toshiba, Samsung and Hitachi (all licenses of Sandisk) have the technology and patents to manufacture high-capacity flash memory. 80% of SSTI’s production low-end 2 megabit cards
· Projects 20% growth in Q3 and 25% growth in Q4
· North America 47% of revenue, Japan 26%, Europe 18% and Asia 10%
· 65% of sales are in the consumer market driven by explosive demand of MP3 players and digital cameras. Over 100 MP3 players on the market
· Will move to 256 megabit products. Micron mfg. from .28 to .24, which will improve yields and capacity
Seagate at one point earlier this year had 2 to 3 million shares in Sandisk. According to recent SEC filings, as of July 2000 Seagate has sold all of its holding in Sandisk for a gain of $105 million.
Competition and Risks
Sony Memory Stick – Sony will spend millions marketing this flash memory standard. However the company has yet to get much traction for the product and lost out on the key Palm PDA account to Sandisk
Iomega Clik! Drive – Iomega has been having a tough time getting their storage product adopted because of size, cost, power consumption and ruggedness factors. As a real hard drive with moving parts, it does not have the key benefits of flash memory
Toshiba SmartMedia – comparable performance and characteristics with Sandisk MMC media. Doesn’t have the market-share CompactFlash does. However Sandisk private labels Smartmedia cards and sells them as the key partner with Toshiba
Taiwan stability – Sandisk depends on fabs in Taiwan for the majority of flash memory production. Political instability along with natural disasters such as earthquakes are a large concern
The company is heavily dependent on the consumer market for MP3 players and digital cameras, accounting for 65% of revenue. Lower demand for either segment would be detrimental to the growth of Sandisk.
Valuation
-to be added later
** Big thanks to the posters on Silicon Investor, especially Ausdauer for the information. |
