Tags: SanDisk | Stock | Investing | David N Frazier

David N. Frazier: SanDisk Stock Poised for Pullback After Recent Surge

By    |   Friday, 23 May 2014 05:52 AM

SanDisk (SNDK) has been on a tear lately, rising by 26.9 percent from April 11 through Thursday’s close. During the past 12 months, the company’s stock was up a whopping 61 percent as of Thursday, when it closed at $93.20.

Although my initial research on the company indicated that SNDK would continue to move higher during the months ahead, a more thorough review of the company suggests that its stock is due for a substantial pullback.

Before I discuss my reasons for that forecast, here’s a little bit of information about SanDisk for those of you who aren’t familiar with the Milpitas, California-based company.

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SanDisk designs, develops and manufactures flash memory cards for use in digital cameras, camcorders, mobile phones, USB thumb drives and game consoles, as well as higher storage capacity solid state drives (“SSDs”) for use in personal and laptop computers, tablet computers, and enterprise servers.

A flash memory card is a type of small, storage medium that enables electronic data (i.e. text, photos, audio, and video) to be stored in a durable, compact format that retains the digital information even after the power is switched off.

Solid state drives serve the same purpose as hard disk computer drives, but they do so by storing electronic data on interconnected flash memory integrated circuits instead of on magnetic coatings that are applied to the top a hard disk drive’s platter.

Through a joint venture with Toshiba, SanDisk also manufactures NAND flash wafers – semiconductor materials used in the fabrication of integrated circuits – that provide the company with leading-edge, cost-competitive NAND wafers for its end products.

SanDisk has a strong portfolio of patents that help it to stay competitive in a very competitive market. As of Dec. 31, 2013, the company had rights to more than 2,600 U.S. patents and more than 2,100 foreign patents. In addition, the company had more than 1,100 patent applications pending in the United States.

In light of the fact that SanDisk is currently the world’s second-largest supplier of solid state drives, behind Samsung, and that industry analysts expect the demand for SSDs to grow rapidly over the next few years, the outlook for SanDisk appears to be bright.

However, the company’s recent operating performance and its projections for the quarter ending June 30, 2014, as well as for the full year ending Dec. 31, 2014, suggest that stock market participants are overvaluing SanDisk’s stock.

For example, although SanDisk grew its revenues by 22.1 percent for the year ended Dec. 31, 2013 the company’s revenues slowed considerably during each of the past two quarters.

Specifically, SanDisk’s quarterly revenues slowed to a year-over-year rate of 12.1 percent and 12.8 percent for the quarters ended Dec. 31, 2013 and March 31, 2014, respectively.

Worse yet, SanDisk reported on April 16 that it expects its revenues to slow further, estimating that its revenues will rise by a range of only 5 percent-10.1 percent for the quarter ending June 30, 2014. For the full year ending Dec. 31, 2014, the company stated that it expects its revenues to rise by only 3.7 percent-10.2 percent.

In spite of SanDisk’s expected slowdown in its revenues, the company’s stock closed on Thursday at a price-to-earnings multiple of approximately 19 and a price-to-revenues ratio of 3.3. In comparison, the common stocks of SanDisk’s competitors closed on Thursday, on average, at a P/E multiple of 16.4 and a price-to-revenues multiple of 1.2.

While my research indicates that SanDisk might be in a better position to grow its revenues and earnings at a faster pace than its competitors over the next couple of years, the fact that
its stock closed Thursday at a considerably higher level than its competitors, in terms of revenues and earnings, suggests that SNDK is due for a pullback.

The recent trading action in SNDK also suggests that it’s due for a pullback. For example, the trading volume in SNDK fell substantially over the past four weeks, indicating that institutional investors became less interested in buying the stock at prices above $85.19 – the level at which SNDK closed four weeks ago, on April 25.

Secondly, price-momentum statistics indicate that SNDK closed Thursday in substantial overbought territory.

I place much more emphasis of my stock market forecasts on fundamental factors than on short-term trading variables.

That being said, the trading statistics mentioned above seem to support my fundamental analysis of SanDisk’s stock – that stock market participants are currently overvaluing SNDK and that it appears to be due for a pullback.

I urge investors, speculators and short-term traders to stay away from SNDK at this time.

However, if the stock were to pull back to around $85, I would likely encourage stock market participants to allocate a portion of their financial market assets to SNDK.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the president and chief market strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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SanDisk (SNDK) has been on a tear lately, rising by 26.9 percent from April 11 through Thursday's close. During the past 12 months, the company's stock was up a whopping 61 percent as of Thursday.
SanDisk, Stock, Investing, David N Frazier
Friday, 23 May 2014 05:52 AM
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