A weak flash memory market has forced us to maintain a Hold recommendation on SanDisk (SNDK). Moreover, the company has taken aggressive price cuts in Q1. SNDK is investing heavily in new capacity, so we do not expect positive free cash flow until 2010. However, we still believe in the flash market over the long-term, but now believe it is too early to be buyers of SNDK shares.
SanDisk holds the number one market share position in cards and USB drives in the U.S. The company has been able to drive unit/megabyte demand through its pricing leadership. For fiscal 2007, total megabyte sold increased 190% versus average price per megabyte decline of 60%. This resulted in an upside surprise to our estimates. But the NAND memory is a commodity market with prices determined on a supply/demand curve. And market research firm iSuppli cut its outlook for NAND flash and now expects sales to reach $15.2 billion in 2008, up only slightly from the $13.9 billion reported in 2007.
SanDisk's results for the quarter were in line with the company's guidance. For the second quarter, SanDisk expects a more moderate pricing environment and is forecasting total revenue to be between $875 million and $950 million.
The company's stock is trading at 22.1x our 2008 EPS estimate of $1.28 per share. Although we believe that the worst is behind it, we are not expecting a rapid recovery. In light of aggressive price cuts in the first quarter, we are further lowering our estimates. We therefore set a six-month price target of $29.50, representing a P/E multiple of approximately 23.0x our 2008 earnings estimate.
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