SanDisk is selling off rather sharply in response to the company's recent guidance cut. The company today announced that it now expects its revenue to be around $1.3 billion, down from previous guidance of $1.4-$1.5 billion. The management cites production qualification delays, weak enterprise sales and lower pricing as the main culprit for this downward revision. Consequently, the stock is down around 18% on a day that is not a rewarding one, in general, for the technology sector.
We believe that market is overreacting to the situation. SanDisk is a decent NAND play. Connected devices are fueling the demand for data and storage. The argument of secular decline in PC impacting SanDisk is irrelevant as the PC's decline will be more than offset by the growth of mobile and enterprise. Anyhow, let's explore the guidance. The company guided a $100 million below its previous guidance, making an annualized deficit of $400 million. Let's round it to $500 million. Profit margin of the company is around 15.20% for the year-ended 2014. We will use 15% for the sake of calculation. With $500 million lost in revenue, the company will lose around 75 million in earnings. This translates to an EPS loss of $0.35. Now, SanDisk was trading at 13 times forward earnings before the recent development. Let's assume a PE of 15 for the company. According to the relative valuation, SanDisk should have lost $5.25, or 6%, after the news; the stock is down 18%.
We rate SanDisk as a buy amid its exposure to growth end-segments and strong cash flow position. The company is definitely a buy after the sell-off
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