Pacific Crest Constructive On SanDisk, ARM Holdings

July 20, 2015

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On Sunday, Pacific Crest analysts Monika Garg, Jason Celino, Michael McConnell and Hans Chung issued two reports previewing earnings for SanDisk Corporation (NASDAQ: SNDK) and ARM Holdings plc (ADR) (NASDAQ: ARMH).

SanDisk

SanDisk is to announce its financial results after the market closes on Wednesday, and the analysts anticipate a good quarter and in-line guidance. They are modeling earnings of $0.34 per share on revenue of $1.198 billion, versus the Street’s consensus of $0.33 per share and $1.184 billion.

The firm thinks the main topics that management will discuss in the call are the company’s plan for the growth in enterprise SSD and client markets, “the state of NAND markets, the ramp of 3D NAND technology and its impact on the NAND industry.”

The stock is currently trading at a discount to its asset replacement value of more than 50 percent. However, in spite of the weakness seen in the two last quarters, analysts “remain constructive due to its leadership in NAND technology.” They believe “increasing manufacturing challenges could lead to supply/demand balance over the next couple of quarters, and like after the 2012 reset,” the market could see SanDisk's earnings improve.

ARM Holdings

ARM will also report its quarterly results on Wednesday, and Pacific Crest is projecting earnings of $0.34 per share on revenue of $358 million, versus the Street’s consensus of $0.33 per share and $357.55 million.

According to the note, a “higher-than-expected 64-bit penetration rate into the smartphone market” increases the firm’s confidence that 2015 consensus estimates for ARM are too low.

The analysts highlight that the recent underperformance in the stock has been driven by slowing smartphone growth concerns, which appear overblown. This does not mean they don’t recognize the recent weakness in the smartphone market, but it does mean they think “concerns on ARM’s mobile royalty revenue are overstated.”

Moreover, a “projected royalty rate increase provides significant cushion to consensus estimates." Applying the updated guidance to their model, the analysts estimate the smartphone market would need to decline more than 8 percent this year (in relation to the prior one), for ARM to miss estimates. The analysts see this as “highly unlikely.”

Pacific Crest maintains an Overweight rating for both stocks. The firm set a price target of $75.00 for SanDisk, and a target of $61.00 for ARM Holdings.