Results fell short of expectations and led to sell-off! SanDisk (SNDK.US) gains backlash from Wall Street: Strong demand for data centers supports growth prospects

The Zhitong Finance App learned that although SanDisk (SNDK.US) announced better-than-expected results and performance guidelines and announced a stock split, investors seemed to have higher expectations for the memory chip company, causing the stock to fall by more than 8% before the market (as of press release) on Friday. However, Wall Street analysts are still positive about SanDisk's latest results and promise to return excess cash to shareholders, even though some analysts have lowered their target price for the stock.

RBC Capital analyst Srini Pajjuri lowered SanDisk's target price from $1,600 to $1,400 on the grounds that the industry's profit multiplier is shrinking. However, he said that the company's performance and prospects are still strong, and the strengthening of NAND prices has also helped the company.

In a report to customers, Srini Pajjuri wrote: “Looking ahead, we expect strong demand for AI inference and KV caching applications to continue, but the weak PC/smartphone market will bring some resistance. We are raising our profit expectations. Based on FY2028 earnings per share (EPS) of about 5.2 times, we believe risk return is basically balanced, as strong demand for generative AI, tight supply, and steady cash returns will hedge against the slowdown in ASP (average sales price) growth and the weakness of the PC/smartphone market.”

J.P. Morgan analyst Harlan Sur maintained SanDisk's target price target of $2,250 and a “plus” rating, and indicated that demand for data centers is still accelerating. The analyst explained, “From an end market perspective, data centers are still the company's clear growth engine (accounting for about 44% of revenue, and this share will continue to rise). Management expects data center bit demand to increase by about 40% year-on-year in the 2027 calendar year (which has more than doubled in 2026), and the business will account for more than 55% of the entire NAND industry's bit demand at that time.”

Looking at further analysis, Harlan Sur said that SanDisk maintained the quantitative guidance given in the previous quarter because the company expects about 50% of the bit production in FY2027 and about 66% of the bit production in FY2028 to be included in the new business model agreement. However, the company made it clear that the two new business model agreements (NBM) signed in the first fiscal quarter have already been announced to the public.

Harlan Sur said, “Overall, we believe the results announced tonight are further proof that an increase in the share of data center businesses and longer-term customer agreements can support longer-term profitability. Furthermore, new products such as HBF (first streaming completed in the first fiscal quarter, with the goal of providing product samples in the 2027 calendar year) are still likely to bring upside to the company's long-term business model.”

Morgan Stanley analyst Joseph Moore maintained SanDisk's target price of $1,750 and raised earnings expectations for 2027. The stock rating was “increased.” He pointed out that with the stock currently trading at less than 5 times its profit, its risk-return “remains attractive.”

Joseph Moore said, “The performance data is still very strong, and the continuation of this strong performance is increasing, which keeps us positive.” “Across the memory chip sector, it is increasingly unsurprising that fundamentals continue to be strong, and investors are now turning their focus to how long this upward cycle can last. As a result, although SanDisk's high quality performance exceeded expectations and raised guidelines this quarter (EPS exceeded expectations by 7%, the guideline was 4% higher than the market's agreed expectations), it is currently unclear whether there has been any potential improvement in NAND market conditions, given that the market is actually still in short supply and almost all production capacity is sold out over the next many years.”

Performance review

Financial reports show that, boosted by a surge in demand for NAND flash memory driven by artificial intelligence (AI) infrastructure construction and rising product prices, SanDisk's revenue for the first quarter of fiscal year 2027 reached US$11.031 billion, up 378% year on year and 23% month on month. Adjusted earnings per share were $49.51, up about 26% from $39.25 in the previous quarter, and $1.22 in the same period last year. The adjusted gross margin reached 85.1%, a sharp increase of 55.2 percentage points from 29.9% in the same period last year, and an increase of 0.5 percentage points from 84.6% in the previous quarter.

The data center business became SanDisk's fastest-growing business segment, with revenue reaching US$4.8 billion, up 61% from the previous quarter, and surging 1682% from the same period last year. The growth rate exceeded the company's estimate of overall market growth for the quarter. SanDisk said that as AI infrastructure continues to expand, data center demand for high-performance enterprise-grade solid-state drives and high-capacity storage platforms is growing rapidly. The company distributed more product supplies to the data center market in the first fiscal quarter to meet growing customer demand. The company pointed out that customer partnerships, including three US hyperscale cloud computing service providers, have supported the continued expansion of the data center business.

In addition to short-term performance, the long-term customer cooperation arrangements disclosed by SanDisk are also worth paying attention to. The company said that by the end of the first fiscal quarter, it had signed new business model agreements with eight customers in the data center and edge computing sectors. Based on the lowest price agreed upon in the contract, the minimum contract revenue corresponding to these agreements reached 93.9 billion US dollars. Among them, the remaining performance obligations at the end of the quarter were US$88.9 billion, and the total amount of financial guarantees in the form of related cash deposits and financial instruments reached US$16.5 billion.

SanDisk pointed out that demand signals from customers have been extended beyond FY2030, and recent contacts with leading AI companies also show that there is still room for further growth in future demand. Notably, the company said that demand corresponding to its long-term agreement reserves had exceeded the company's supply capacity until the end of this decade.

In terms of return on capital, SanDisk spent $5 billion in the first fiscal quarter to buy back approximately 3.2 million shares. In addition to the $4.5 billion repurchase in the previous quarter, the company invested a total of 9.5 billion US dollars in stock repurchases over the past two quarters, repurchasing a total of about 6 million shares, which is equivalent to about 4% of tradable shares. As of the end of the first fiscal quarter, the company's share repurchase plan still had a balance of US$10.5 billion. SanDisk said that the company will continue to prioritize investment in business, maintain a sound balance sheet, and plan to return all excess cash to shareholders. Additionally, SanDisk's board of directors approved the implementation of a 1-split 8-share split plan. According to the arrangement, the additional shares are expected to be distributed on November 19, and trading of the split adjusted shares is expected to begin on November 20.

Looking ahead to the second quarter of fiscal year 2027, SanDisk expects revenue to be between $12.2 billion and $12.6 billion, up about 12% from the first fiscal quarter's $11.031 billion; GAAP gross margin for the second fiscal quarter is expected to be between 84.4% and 85.4%, and non-GAAP gross margin is between 84.5% and 85.5%, which means profitability is expected to remain at a high level; it is expected that adjusted earnings per share for the second fiscal quarter will be between $55 and $57, at a median value of $56, compared to 49.51 in the first fiscal quarter The dollar grew by about 13%.

Regarding subsequent market trends, SanDisk said that the increase in structural demand brought about by AI infrastructure construction and the expanding application of NAND flash memory in the field of AI inference will continue to support the development of the storage industry. The company expects the NAND market to remain strong in 2027, and the data center business will remain the main growth engine.