In the technology business, staying innovative is central to a firm’s success. Some data storage companies seem to understand this and focus on rising technologies like Solid State Drives (SSDs), which position them to benefit from the increasing demand and the switch to these technologies.
In this article I will take a look at three firms that seem to be leading in the SSD segment and offer compelling growth opportunities for the upcoming years. These are: SanDisk Corporation (NASDAQ:SNDK), Micron Technology, Inc. (NASDAQ:MU) andWestern Digital Corp. (NASDAQ:WDC).
SanDisk leading the market
SanDisk Corporation (NASDAQ:SNDK) is a leader in the data storage industry and specializes in flash memory storage products used in both consumer electronics and industrial markets. As the demand for various appliances in which SanDisk products are used -including cameras, digital music players, smartphones and tablets- increases, the company will earn substantial profits. As the demand is greater than the production in this area, pricing should trend upwards, widening margins.
There is one feature that truly differentiates SanDisk from its competitors: its vertical integration. The firm not only manufacturers Negated And or Not AND (NAND) flash memories, through a joint venture with Toshiba, it also supplies chips for manufacturers like Apple and HTC to embed into their gadgets and “sells its own branded memory cards and USB drives via retail sales channels. Further, SanDisk’s strong technology position and intellectual property (IP) portfolio, which contains some key NAND flash memory patents, allows the firm to collect licensing and royalty revenue from its competitors,” according to Morningstar.
For the coming years, SanDisk Corporation (NASDAQ:SNDK) has made a bet on Solid State Drives (SSDs) and is now focusing its efforts on market penetration. The company expects this segment to provide about 25% of revenue by 2014, and 35%, by 2016. Another good looking initiative is its NVIDIA partnership, combining NVIDIA’s Tegra 4 graphics with SanDisk’s iNAND Extreme storage, allowing smartphone and tablet makers to create faster and more efficient products. This should attract the attention of some major customers in the quarters ahead and drive income growth in the longer term.
In spite of the cyclicality inherent to the NAND memory segment and the commodity-like nature of SanDisk´s products, I would rate this firm as a STRONG BUY. Poised to comfortably outperform the market, with an expected consensus Earnings Per Share growth of 28.4% per year over the next five years and trading at 30.4 times its earnings (a 16% discount to the industry average), this is a stock that you wouldn’t want to miss. Add it to your portfolio before its price gets any higher.
Micron: An important contender
Micron Technology, Inc. (NASDAQ:MU) is one of SanDisk’s main contenders in the semiconductor memory space. Despite increased competition, the cyclicality in the industry and a 52-week high price, I’d recommend BUYING and holding this stock: its scale and wide product portfolio should help it navigate these troubled waters without major inconveniences.
However, earnings growth is expected to be slower than for SanDisk Corporation (NASDAQ:SNDK) so, why buy? Well, for starters, expectations are only that, expectations. Reality can vary widely, so diversifying your investments wouldn’t be a bad idea. Then, why Micron Technology, Inc. (NASDAQ:MU)?
One of the company’s main competitive advantages lies in its economies of scale, derived from its leading positions in both Dynamic Random Access Memory (DRAM) and NAND flash memories manufacturing, and further expanded by its
Numonyx and Elpida acquisitions
.
Despite having invested in its DRAM segment by purchasing Elpida a few months ago, the firm’s focus and future growth catalysts are in the NAND business, especially as the demand for SSDs increases. As forecast by Morningstar analysts, “advancements in NAND fabrication will drive SSD production costs down to a level that are attractive to small businesses, spiking SSD sales and driving growth for Micron.”
Although its last reported quarter offered mixed results, the company did beat consensus estimates and provided confident guidance in the mobile and server segments. Going forward, a strict cost control, manufacturing efficiency and a secular switch towards mobile DRAM technologies will benefit Micron Technology, Inc. (NASDAQ:MU)’s fundamentals.
Furthermore, a joint venture with Intel to produce NAND memories in Singapore should drive growth in the upcoming years, especially as their co-developed Hybrid Memory Cube was chosen as the memory product of the year by the EE Times. The agreement will continue to generate cooperation between these two firms in the development of emerging memory technologies. Meanwhile, Micron Technology, Inc. (NASDAQ:MU) stands as the main beneficiary of the rivalry between Apple and Samsung, and an increased demand and pricing on DRAM, mobile/specialty DRAM, and NAND technologies should drive next year’s earnings well above the current estimates.
Western Digital Corp. (NASDAQ:WDC): Diversity and branded products
Western Digital Corp. (NASDAQ:WDC) is a more diversified firm than the previous two. It produces hard drives for desktops, mobile phones, businesses and consumer electronics, along with its own branded products. However, its SSD segment is the one that puts it in this article. As the second largest in the storage segment with roughly 40% of the hard-drive market and the lowest operating expenses, its incursion in the SSD field should be watched closely.
HDD sales should remain high for some time – especially in price-sensitive, developing economies — due to the much lower cost compared to SSDs. This will provide upside for this company in the short-term while facing reduced competition risks, as entrants are not likely to appear in a mature and soon to decline industry. Nevertheless, in the longer-term, its success will rely on a successful transition to the SSD market.
Western Digital Corp. (NASDAQ:WDC) has proven that it will be able to compete in the SSD market and expects its sales to rise in the upcoming years thanks to a recovery in consumer spending power, along with stronger PC and notebook demand. Although analysts expect EPS growth to be somewhat slow in the years to come, the company looks strong and offers compelling growth opportunities in various other fields, especially in the enterprise market, after acquiring Hitachi’s drive business.
Trading at only 8 times its earnings, a 78% discount to the industry average valuation, while offering wide margins and returns, I’d say that Western Digital is a BUY, for the short and long-term. Holding this stock for a while and watching how it evolves should provide upside for investors while yielding about 1.57% in the form of dividends.
Bottom line
Although Western Digital Corp. (NASDAQ:WDC)’s dominance in the HDD segment makes its incursion in the SSD industry promising, both SanDisk and Micron, with a longer time in the flash memory business look more attractive.
Adding these companies to your portfolio should provide plenty of upside as SSD production prices drop, the demand for these products increases and the companies assert their dominance, as they have done in the flash memory space. Post-Elpidia Micron is a giant that cannot be ignored, and I share the consensus on SanDisk, which is BUY.
Damian Illia has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.
The article A Promising Future for Data Storage Stocks originally appeared on Fool.com.
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