Key Points
Sandisk turned in another strong quarter of revenue growth and margin expansion.
The stock looks cheap if the flash memory cycle has staying power.
Sandisk (NASDAQ: SNDK) has been one of the market's best-performing stocks this year, but it slid 13.5% in the session following its fiscal Q1 earnings report on Oct. 29, despite the memory maker seeing its sales surge and profits soar. The stock is still up around 375% on the year, even after the pullback, though down more than 50% from its earlier highs. This could make this recent dip a buying opportunity.
Sandisk has been a big beneficiary of rising NAND (flash) memory prices, as supply shortages have caused prices to skyrocket as demand climbs. This is due to a combination of artificial intelligence (AI) data centers needing massive high-performance solid-state drives (SSDs) that use flash memory to hold training data and the big three memory makers shifting their focus toward high bandwidth memory (HBM), a special form of DRAM (dynamic random access memory) that gets packaged with graphics processing units (GPUs) and other AI chips to reduce latency.
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Sandisk revenue and margins continue to soar
As a pure-play NAND maker, Sandisk's revenue has been surging, as prices continue to rise rapidly. This continued in the company's fiscal Q1, with its revenue jumping 378% to $11 billion.
Data center revenue skyrocketed 1,682% year over year to $4.8 billion, driven by demand from its partnerships with three large U.S. hyperscalers. Its Edge segment, which includes smartphones and PCs, saw revenue jump 320% to $5.8 billion, while the consumer segment, which consists of things like flash drives, saw revenue decrease 39% to $397 million.
Sandisk said that 60% of its revenue growth came from volume increases and 40% from pricing. This is presumably based on its sequential growth. Pricing, meanwhile, has also boosted Sandisk's gross margins. For the quarter, gross margin climbed from 29.9% last year and 84.6% in fiscal Q4 to 85.1% in fiscal Q1. The company's adjusted earnings per share (EPS), meanwhile, rose from $1.22 to $49.51. That's well above the adjusted EPS of $44-$46 it previously forecast.
Looking ahead, Sandisk management guided for fiscal Q2 revenue to be between $12.2 billion and $12.6 billion, up from $3 billion a year ago. Gross margin is projected to be between 84.4% and 85.4%, up from 50.9% a year ago. Adjusted EPS, meanwhile, is expected to climb from $5.15 to between $55 and $57.
Sandisk said it has eight new business model (NBM) contracts, with an average weighted duration of more than four years. The minimum contract floor pricing on the deals is $93.9 billion, and it has $16.5 billion in financial guarantees. About half its bits are committed to NBMs this year and two-thirds in fiscal 2028.
Sandisk expects industry data center demand to grow by 40% in calendar year 2027. Meanwhile, it said that its NBM pipeline is greater than its supply through the end of this decade.
Is Sandisk stock a buy on the dip?
Memory stocks are cheap on a forward price-to-earnings (P/E) ratio basis, and Sandisk is no exception, trading at just over 5 times fiscal 2027 analyst estimates. The cheap valuations in the space largely reflect the historically cyclical nature of the memory market, which tends to see large boom-and-bust cycles.
Arguably, this memory cycle will be much different than any seen in the past. Demand for both DRAM and NAND has been insatiable with AI, and companies have not been able to keep up. The big three memory makers of Samsung, SK Hynix, and Micron are largely focused on HBM, which carries high prices and strong margins, and is seeing demand soar. While the NAND market has more players than the DRAM market, the priorities of the big three memory companies are generally to keep NAND supply growth in check, as their physical cleanroom space and fab capacity are shifting more toward HBM, which is a capacity hog.
Just like GPUs and CPUs, memory is often a short-term asset that needs to get replaced every several years. Combined with long-term contracts, continued rising demand, and clean room constraints, expect this NAND cycle to last much longer than past ones, making Sandisk a top AI stock to own on this dip.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.