Sandisk's Plunge: Overreaction or Warning?

Sandisk (SNDK) has been a market darling, surging over 2,820% in the past year, but the stock has recently retreated about 47% from its June highs. The trigger was its fiscal Q4 earnings report, where revenue guidance for the next quarter fell just short of analyst expectations. This sparked fears that the memory chip cycle might be peaking.

In fiscal Q4, Sandisk delivered spectacular numbers: revenue soared 372% year over year to $9 billion, and gross margins expanded to 84.6% from 26.2% a year ago. Adjusted EPS skyrocketed to $39.25, far exceeding the company's own forecast of $30-$33. The growth was driven by surging NAND flash memory prices, fueled by AI data centers' insatiable demand for high-performance storage.

However, the company guided fiscal Q1 revenue to a midpoint of $10.55 billion, slightly below the $10.62 billion consensus. It also projected gross margins to dip sequentially to 83%-85%, though still robust. This minor miss was enough to spook investors who are wary of the historically cyclical nature of the memory market.

Sandisk is proactively addressing these concerns by signing long-term contracts with data center and edge customers. Since its last earnings report, it added three new deals, bringing the total to eight, covering $93.9 billion in revenue at floor pricing and $16.5 billion in financial guarantees. This strategy trades some near-term upside for multi-year visibility.

The company also plans to grow production at a mid-to-high-teens rate, expecting supply and demand to balance within four years. While consumer markets (smartphones, PCs) remain weak, Sandisk sees major opportunities in agentic AI and KV-cache, which require massive storage capacities.

Sandisk's stock drop reflects a broader concern: is the memory chip boom sustainable? The company's revenue and margins are at record highs, but investors worry that a supply glut could crush prices, as happened after the pandemic. However, the current demand is structurally different, driven by AI data centers that need enormous, high-performance SSDs for training and inference.

The long-term contracts are a game-changer. By locking in floor pricing for up to five years, Sandisk is reducing its exposure to price volatility. This provides earnings visibility that the market hasn't fully appreciated. The $93.9 billion in contracted revenue is a massive backlog that should support growth even if spot prices fluctuate.

Sandisk's competitive position is strong. It's one of the few players in NAND flash, alongside Samsung, SK Hynix, and Kioxia. The big three have been disciplined in managing supply, focusing on high-bandwidth memory (HBM) for AI chips, which limits NAND capacity growth. This supply constraint should keep prices elevated for the foreseeable future.

Moreover, Sandisk is innovating with high-bandwidth flash (HBF), developed with SK Hynix, which could be a major technology for AI inference. This could open new revenue streams and further differentiate the company.

At a forward P/E of 5.6 times fiscal 2027 estimates, the stock is priced for a severe downturn that may not materialize. If Sandisk delivers on its contracts and AI demand persists, the current valuation offers a compelling risk-reward for long-term investors.