Wall Street Punishes Sandisk's Outlook: What Investors Are Missing

Sandisk continues to see revenue and profits soar on the back of high NAND prices.

The company is starting to trade some near-term upside for longer-term visibility.

Sandisk (NASDAQ: SNDK) has been one of the hottest stocks in the market over the past year, up over 2,820%, but the stock continued its recent retreat following its fiscal Q4 earnings report and is now off around 47% from its June highs.

The memory chip maker continued to see surging revenue and substantial gross margin expansion in its fiscal Q4 that ended July 3. However, fiscal Q1 revenue guidance that fell just below analyst expectations helped sink the stock, as investors continue to look for signs that the memory cycle may turn.

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Sandisk has benefited from soaring NAND (flash) memory prices, as the market remains supply-constrained. This is largely due to the big three memory makers reducing NAND production and shifting their focus toward DRAM (dynamic random access memory) following a crash in the NAND market after the pandemic pulled forward demand for electronics.

However, NAND demand soon shot up as AI data centers suddenly began using enormous, high-performance solid-state drives (SSDs) composed of flash memory to store training data. Meanwhile, NAND capacity has been slow to increase, as the big three memory makers pour most of their resources into high-bandwidth memory (HBM), which gets packaged with graphics processing units (GPUs) and other AI chips, to reduce latency and improve power efficiency.

Given how cyclical the flash market has historically been, Sandisk has decided to give up some near-term gains in favor of long-term visibility and durability by signing long-term contracts. That is why the midpoint of its Q1 revenue guidance, between $10.3 billion and $10.8 billion ($10.55 billion midpoint), came up just short of the $10.62 billion consensus. Fiscal Q1 gross margins are expected to fall sequentially but remain robust between 83% and 85%, and the midpoint of its projected EPS of between $43 and $46 ($45 midpoint) was above the $44.21 consensus.