Computer memory manufacturer Sandisk (NASDAQ:SNDK) has quietly been one of the best stocks to own over the last year, having delivered returns of over 1,500 percent. With such large gains already behind it, though, the question presents itself of how much further SNDK can rise. Is Sandisk the next big memory stock, or has most of its value already been priced in?
Sandisk as a Play on AI
The recent surge among memory stocks has been a direct result of the construction of new AI data centers, creating a mismatch between supply and demand in the memory market. With memory prices rising at unprecedented rates and not enough high-bandwidth memory available to meet the needs of AI data centers, manufacturers are operating in an extremely favorable pricing environment.
Sandisk may be positioned to address the HBM shortage problem with high-bandwidth flash memory, a type of memory technology based on the NAND memory typically used for high-volume data storage. Although NAND is typically slower than the DRAM memory used for active computing tasks, Sandisk claims that its HBF comes close to the bandwidth achieved by traditional HBM and offers 8-16 times the amount of memory capacity that comparably-priced HBM would provide.
HBF could surpass HBM in terms of market size over the long run, with the two technologies working together as complementary memory layers to marry the speed of HBM to the capacity of HBF. While there’s little doubt that this kind of flash memory has enormous potential, however, it’s important to remember that it’s still an emerging technology that hasn’t yet proven itself.
In addition to HBF innovation, Sandisk is also able to cash in on elevated demand for ordinary storage driven by the needs of AI. Sandisk is expected to roughly double the price of its high-capacity SSDs this quarter, following broader industry trends of rising prices across all forms of memory.
Sandisk’s FY Q2 Numbers Stand Out
Like most memory manufacturers, Sandisk’s revenues have soared over the last year as computational demand has sent memory prices skyward. In its fiscal Q2 results, reported on January 29th, Sandisk detailed year-over-year revenue growth of 61 percent to $3.03 billion. Impressively, this revenue number was even up by 31 percent on a quarter-over-quarter basis.
Even more impressive were Sandisk’s profitability metrics. Net income for fiscal Q2 was $803 million, an increase of 672 percent from the year-ago quarter and 617 percent from fiscal Q1. On a per-share basis, this translated to an increase from $0.72 to $5.15 per share in just one year.
Encouragingly, Sandisk’s current growth isn’t being driven exclusively by data center construction. While data center revenue was the fastest-growing segment for Sandisk last quarter at 64 percent year-over-year, it still represented the smallest share of the company’s total revenues at $440 million. Consumer revenue rose by 39 percent to $907 million, more than double what Sandisk brought in from data center sales. Edge memory, meanwhile, still made up the largest share of Sandisk’s revenues at $1.68 billion, though this was the slowest-growing category at 21 percent. The fact that Sandisk is posting double-digit revenue growth across its business segments and still has significant room for expansion could bode extremely well for its future performance.
Speaking of future performance, it’s important to acknowledge that analysts currently foresee enormous earnings growth over the coming several years. The consensus 3-5 year EPS growth estimate calls for compounded annual growth rates in excess of 200 percent, a massive target for Sandisk to hit. Considering the results it has been able to deliver in its current fiscal year so far and the opportunities being presented by overwhelming memory demand, though, it’s far from impossible that Sandisk could keep its EPS growth rate in triple-digit territory for quite some time to come.
Is SNDK’s Valuation a Problem?
After the massive gains of the past year, SNDK stock looks anything but cheap at 12.0 times sales and 38.6 times cash flow. Despite exceptional performance in fiscal Q2, Sandisk still carries a trailing 12-month loss of ($7.59) per share, though the massive gains in profitability it demonstrated in Q2 suggest that the business is likely in for a period of strong profitability ahead.
It’s also worth noting that analysts don’t see a great deal of upside left in SNDK. The average price forecast of $635.71 would see the stock rise by about 6.3 percent from the most recent price of $597.95, but it appears that Sandisk may have already captured most of its probable near-term returns.
Is Sandisk the Next Great Memory Stock to Buy?
Sandisk’s play on HBF memory and its crucial role as a large provider of conventional flash memory could be massive for the business, especially if investment in AI data centers continues as expected over the next several years. The problem, however, is that several years of very high growth appear to have already been priced in. Sandisk’s run over the last year has been nothing short of extraordinary, and its performance appears to justify much of that enthusiasm. Even so, investors today may be paying too high a price for future earnings growth.
Indeed, some signs of valuation strain are already showing in Sandisk’s share prices. Since February 3rd, SNDK’s prices have fallen by over 14 percent on growing skepticism surrounding AI and AI-adjacent stocks. With SNDK clearly at elevated prices on assumptions of growth associated with AI, the stock could be particularly vulnerable to cooling market sentiment around artificial intelligence.
While Sandisk remains an appealing business with very real potential to take advantage of unprecedented data center construction, the stock is likely a bit too expensive to buy at today’s prices. This could be especially true when one considers the timeline for the much-anticipated HBF deployment. Sandisk isn’t expecting to ship its first HBF samples until later this year, and it could be next year before the new memory technology begins generating substantial commercial revenue.
With this in mind, Sandisk could still be a good stock to watch and potentially buy if it pulls back enough. The company’s performance and soaring profitability, combined with a computer memory market that could remain red-hot for multiple years, make Sandisk an appealing play on secular technology trends. If the pricing becomes somewhat more reasonable, the stock could become an attractive buy-and-hold opportunity for investors.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.