After reporting mixed third-quarter results, SanDisk Corp. (SNDK) lowered its revenue outlook for the fourth quarter of 2014 based on a soft demand scenario. Following the announcement, the company’s shares plunged 13.9% yesterday.
The company expects to earn $1.73 billion in the fourth quarter of 2014, lower than the previous guidance of $1.80 billion to $1.85 billion. The Zacks Consensus Estimate is pegged at $1.82 billion. The leading memory chip maker for smartphones and tablets also expects its fourth quarter non-GAAP gross margin to be roughly 45% compared to the earlier guided range of 47%–49%.
Lower-than-expected demand from both iNAND products and retail sides of the business led the company to provide a weak revenue outlook. Also, fourth quarter guidance was weak, owing to demand uncertainty from smartphone makers.
According to some analysts, sluggish smartphone sales at Samsung Electronics Co. could be a cause for concern. Not only does this mean that Samsung will buy less memory, but it could also mean that its internally produced memory chips will be sold to others, thus increasing competition in the market.
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. In such a scenario, weaker-than-expected sales from NAND flash memory chips could be a headwind for SanDisk.
It is also worth mentioning that Apple Inc. (AAPL) is currently a major customer of SanDisk. However, reportedly, SanDisk didn’t get a significant boost from the sales to Apple, which in turn compelled the company to provide a tepid revenue outlook. But we believe that the issue will have a short-term effect on the figures.
Separately, another company Micron Technology Inc. (MU), a direct peer of SanDisk fell more than 5% yesterday. The lower-than-expected revenue outlook of SanDisk impacted Micron’s share price as well.
Nevertheless, SanDisk remains positive on embedded solutions and enterprise SSD revenue growth, favorable product mix and better supply/demand metrics in 2015. Given the strong demand from OEM customers and enterprise demand at the 19-nanometer technology node, SanDisk expects bit supply growth to be at the lower end of the range of 30% to 40%. The company also expects revenues from enterprise SSD to surpass $1 billion in 2015.
Moreover, the strategic acquisitions of Fusion-io Inc and SMART Storage Systems are expected to expand SanDisk’s offerings in the Enterprise SSD segment.
SanDisk reported mixed numbers in the third quarter of 2014 with the top line missing the Zacks Consensus Estimate, while the bottom line beat the same. Revenues from Commercial channels were strong, aided by client and enterprise class SSD sales. However, declining price per gigabyte, primarily due to an unfavorable product mix, could impact the company’s results.
Going forward, lackluster PC sales, competition from Micron Technology and currency fluctuations remain headwinds.
Currently, SanDisk has a Zacks Rank #4 (Sell).
A better-ranked stock in the technology sector is Rambus Inc. (RMBS), which sports a Zacks Rank #1 (Strong Buy).
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