For much of its 25-year history, SanDisk (SNDK) has lurched from boom to bust, then back. Such is the life of a company whose fortunes are tied to flash memory, a type of storage used in smartphones, tablets, and the memory cards found in digital cameras. SanDisk’s stock has dropped more than 25 percent seven times in the last seven years alone.
Things are currently looking up for the company, with its shares having risen 83 percent over the last year amid demand for smartphones and tablets. And while it might seem logical to latch onto the mobile-device boom, the company is setting its sights upmarket and hoping to convince companies that run data centers to use more of its flash storage. ”Each is a megamarket,” says Sanjay Mehrotra, the company’s president and chief executive, in an interview with Bloomberg Businessweek.
The enterprise-computing market could have a calming effect on SanDisk’s business. For one, storage products command higher prices. The increasing technical difficulty that comes with each subsequent innovation in the market has helped keep supplies in check. “That’s the goal: Move upmarket and up the value chain to get better margin,” said Mark Newman, a senior research analyst with Sanford C Bernstein.
At one point, SanDisk sold about two-thirds of its products directly to consumers at such places as Best Buy (BBY)—a business plan that leads to a particularly volatile existence. The company has reversed course in recent years, reducing the proportion of retail sales to about a third of its revenue and focusing largely on selling flash memory to companies that make smartphones and tablets. In 2012, the market for flash memory used in mobile devices totaled $11 billion, according to Mehrotra.
The number of mobile devices that use flash memory is expected only to rise, and each successive generation of smartphones gobbles up more memory per device. Still, Mehrotra doesn’t see mobile devices as his company’s greatest opportunity for growth. Instead, Sandisk is focused on getting data centers and other enterprise computing equipment to integrate SanDisk’s products into their operations. While it projects the market for flash memory for mobile devices to rise to $15 billion by 2016, it expects the so-called solid state market, which largely comprises enterprise uses, to double in size by then, equaling the mobile market in overall size. Capturing the enterprise market goes beyond building chips and into controllers—the hardware that serves as the brain of a disk—and software to take advantage of the increasingly efficient components. Sandisk snapped up enterprise companies such as Schooner, Flashsoft, and Pliant to help it pursue these tasks.
For people running data centers, speed for price is the tradeoff that comes with using flash memory instead of hard disks. Netflix (NFLX), for instance, keeps popular movies in flash memory, while everything else is kept on slower, cheaper hard drives. The story behind SanDisk’s success, of course, has been forcing the prices of its products ever downward through technological improvement; SanDisk’s products are a testament to Moore’s Law, which basically says that computers get twice as efficient every two years. Its current generation of flash memory products have 32,000 times the capacity of its original storage products, and they are sold for a per-byte price that is 50,000 times less expensive, said Mehrotra.
But the company’s attempts to push efficiency into its memory has reached the molecular level, and there are only so many things it can do to push handfuls of electrons around. The increased technical challenge is reflected in the slowing rate of reduction in the costs of making flash memory. While costs dropped at a rate of about 40 percent until about 2010, Mehrotra expects the next several years to see only a 15 percent to 25 percent annual drop in price. ”Moore’s Law is getting stressed,” he said.
The answer, eventually, will be to begin stacking rows of cells on top of one another. Mehrotra likens the process, known as 3D memory, to shifting from building ranch-style houses to building multiple story buildings. There isn’t an economic incentive for Sandisk to make the leap yet, and Mehrotra believes this won’t change for several years. In the meantime, the difficulty of improving beyond the current level of technology could give SanDisk a smoother ride.
“This new paradigm is leading to a much more stable industry,” said Newman. “It’s due to the inherent slowdown in technology.”