#-ad_banner-#Since the 1950’s, computer data has been stored on spinning platters, known as hard disk drives. These drives consume a lot of energy and give off a lot of heat.

A half century later, hard disk drives met their match in solid-state storage drives, which are much faster, have no moving parts and are available in DRAM and NAND flash memory (I’ll talk about the difference between the two shortly). But adoption of solid-state technology has been slow due to their relatively high price points.

Yet the cost to build solid-state devices is slowly dropping, and over an extended time period, it is increasingly the better choice.

The Storage Networking Industry Association calculated the total cost of ownership for hard disk and solid-state storage. As the chart below illustrates, the cost to operate solid-state storage over five years is nearly a third that of hard disk drives.

Hard disk drives still represent the majority of memory, but they are experiencing annualized unit sales declines in excess of 15% due to the new price advantage of solid state. Unit volume for solid-state drives is expected to grow at an annual pace of 59% to 3.9 million units over the three years to 2016, with a 43% average annual growth in revenue to $3.5 billion.

A Vertically-Integrated Leader In Solid State
The increase in demand for flash memory (NAND, mentioned above) could drive sales for SanDisk Corp. (Nasdaq: SNDK), which has increased solid-state drive revenue to 29% in 2014 from just 1% of total sales in 2010.

The revenue share for embedded and other memory has remained relatively stable at 23% and 11% over the period, while the share from removable memory has fallen to 38% of the total from 69%.

SanDisk is a leader in NAND flash technology and one of the few memory providers with a vertically-integrated business. The company fabricates its own chips in a joint venture with Toshiba Corp. (OTC:  TOSYY) and provides manufacturing and software solutions throughout the solid-state drive supply chain. The company also owns more than 5,000 patents and was named among Thomson Reuters’ 2014 Top 100 Global Innovators.

While enterprise solutions have been a key focus, SanDisk also continues to innovate in retail memory as well. The company unveiled the world’s smallest USB flash drive in June with the Ultra Fit USB 3.0, a 128 GB drive about the size of a dime.

Against its position in the space and outlook for solid-state drives, SanDisk has stumbled lately. Inventory issues led to a drop in sales and share price weakness. The company missed on both top line and bottom line Q1 expectations and issued a negative outlook for the rest of 2015. Shares have fallen by 20% since the company pre-announced earnings in March.

The DRAM Versus NAND Battle
While SanDisk focuses more squarely on NAND technology as a memory device, its competitor, Micron Technology, Inc. (Nasdaq: MU), utilizes a rival technology known as DRAM.

DRAM technology is faster because it does not overwrite existing data. In contrast, NAND erases a block of data before a new one can be written. Yet the cost for DRAM storage is significantly higher than NAND. That’s because it has a lower density factor, which means you have to buy more DRAM modules to reach the same level of capacity you get from NAND.

Another key disadvantage of DRAM is its volatility. Stored memory is lost in the event of a power failure, a big reason most enterprise-level solid-state drives are using NAND flash technology. Data centers cannot risk the loss of data in the event of a power failure.

Even on a relative disadvantage of write performance compared to DRAM, NAND flash still writes up to 10 times faster than hard disk drives. On its memory storage advantage, NAND is winning much of the business from the decline in hard disk drive memory.

In reality, the absolute scale of enterprise business that will be transitioning from hard disk to solid state over the coming years probably means that both DRAM and NAND technology will see strong demand. Some data centers are combining the two solid-state technologies to benefit from the memory and cost advantage in NAND along with the speed advantage in DRAM.

While Micron holds appeal, I like SanDisk’s vertical integration in the flash memory space and its strong patent position, which generates more than $350 million in annual licensing agreements.

Barbarians At The Gate
Some analysts think SanDisk’s focus on solid-state drives may make it a target for acquisition. Analysts at Susquehanna have raised the prospect of an acquisition by Western Digital and a replacement value on SanDisk of $106 per share, which is more than $60 above the current price.

Replacement value represents an analyst’s estimate of the cost to build manufacturing capacity plus the value of other assets.  Western Digital lacks the manufacturing capacity in NAND so buying SanDisk would save it from purchasing chips.

Bernstein Research has also brought up the potential for an acquisition, but adds Micron and Seagate as potential buyers. An acquisition by Micron would create a solid-state drive giant with unrivaled strength in both DRAM and NAND. The combined company would have a competitive advantage in its ability to offer hybrid enterprise solutions. Both Susquehanna and Bernstein have price targets on SanDisk of around $100 per share.

While shares languish, the company’s board of directors is earmarking some for the company’s huge cash stockpile of $2 billion in support of share buybacks.  $784 million in shares were repurchased in the last quarter alone and $2 billion over the past twelve months. Even on high investment spending of $515 million last year, the company still had free cash flow of nearly $1.5 billion.

Shares trade for 13.5 times trailing earnings, though earnings are expected to fall to $2.85 per share this year on a 16.3% drop in sales to $5.55 billion. The shares pay a respectable 1.9% dividend yield as an incentive for investors to wait on price upside. I am willing to wait for my $80 price target on an estimate for 2016 consensus earnings of $4.44 per share.  But I don’t think I’ll have to wait long. SanDisk’s patent portfolio and position in NAND flash could bring out buyers or activist investors soon, driving shares higher as the company pursues strategic options.

Risks To Consider: The rest of 2015 could be difficult for SanDisk as it adjusts to stronger SSD demand and digs itself out of recent stumbles.

Action To Take –> Shares of SanDisk should be supported by valuation and the potential for activist or buyer interest while the longer-term outlook is strong on a shift to solid-state storage.

Want to avoid the hassle of digging into a company’s financials and decoding corporate lingo? StreetAuthority’s Stock Of The Month delivers full analysis of one premier investment to your inbox each month. To learn more about this service, click here.