Key Points
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Sandisk is soaring amid rising demand for memory hardware.
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Shares are still surprisingly fairly valued, but that doesn’t mean the company is free from long-term risk.
- 10 stocks we like better than Sandisk ›
For technology investors, generative artificial intelligence (AI) has been the gift that just keeps giving. Money continues to pour into the sector as Wall Street and Silicon Valley both race to maximize their exposure to what could be a transformational long-term megatrend.
Sandisk (NASDAQ: SNDK) has been one of this year’s biggest winners, with shares up by an eyepopping 600% since January. Let’s dig deeper into the pros and cons of the company to decide if it is still a good buy, or if investors should consider taking some profits off the table.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
What is Sandisk, and why is it booming?
While Sandisk is a bit of a household name, it only became publicly available as a stand-alone entity in early February when its parent company, Western Digital, divested ownership. The separation allows each company to focus on its specific niche within the market.
Both companies provide computer memory and storage, but Western Digital specializes in hard disk drives (HDDs), while Sandisk is a leader in solid state drives (SSDs). Unlike HDDs, which use moving parts to store data, SSDs operate with no mechanical components, making them faster, more reliable, and extremely energy-efficient. That last characteristic is crucial for AI data center clients that need to handle massive amounts of information while trying to minimize their costs of operation.
The performance of the two stocks has diverged sharply over the last 12 months. This highlights how SSDs are much better suited to serving the rapidly growing AI infrastructure market.
SNDK data by YCharts.
Business is booming, but what comes next?
Sandisk’s incredible stock price growth isn’t based on hype alone. The company’s fiscal third-quarter revenue soared by an eyewatering 251% year over year to $5.95 million, while gross margins rose 55.9 points to 78.4% — a number higher than many software companies that don’t even sell physical products. The combination of soaring growth and margins has caused operating income to explode by 319% to $4.11 billion.
Investors can expect Sandisk’s momentum to continue in the near term because generative AI models continue to get larger and more demanding. Furthermore, hyperscalers remain committed to their data center buildouts, with analysts at Goldman Sachs projecting that total capital spending could reach $1.1 trillion in 2027.
Furthermore, some industry leaders believe memory shortages could last until 2030. If this is true, producers like Sandisk could continue enjoying the elevated margins by keeping prices high.
That said, the medium- to longer-term situation remains much more difficult to predict. It seems hard to believe that big tech companies will continue to spend sums that often exceed their cash flow on what remains a somewhat speculative technology. It could only be a matter of time before shareholders start pressuring management teams to show more restraint. That could eventually deflate the AI bubble.
Sandisk is also exposed to the cyclicality of the memory industry, which tends to experience booms and busts much like a commodity. Previous surges in memory demand (such as the PC boom in the 1990s or the smartphone boom in the 2010s) ended in sharp crashes as supply caught up to demand and prices cratered. Investors shouldn’t expect the current AI-driven boom to change this long-established pattern.
Is Sandisk stock still a buy?
While Sandisk will continue to enjoy elevated revenue and profit growth amid the AI data center boom, this won’t last forever, and the risks of a correction are starting to rise. Investors who already own the stock should probably consider taking some profits off the table. Investors who missed the big rally should probably look elsewhere for value.
Should you buy stock in Sandisk right now?
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
