Wall Street can usually agree on a stock to within a few percentage points. On memory maker Sandisk (NASDAQ: SNDK), it can’t come within $1,430 — at least that is the case for two analysts.
This week, Susquehanna trimmed its price target on the stock to $3,050 from a prior $3,250 and kept its positive rating. Wells Fargo went the other way, raising its target to $1,620 from $1,250 — and still declined to recommend buying the shares.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
With the stock around $1,600 as of this writing, one firm is saying Sandisk could nearly double within a year. The other is saying today’s price is already just about right. They can’t both be right, and the gap between them maps the entire debate over arguably the hottest stock of the past year.
That heat is worth restating. Sandisk’s 52-week range runs from $40.10 to $2,354.39. At its peak, the stock had traded as much as 58 times higher than its low. Nothing about a move like that is normal, and neither is the disagreement it left behind.
Image source: The Motley Fool.
What the $3,050 side believes
Susquehanna’s case rests on the idea that this memory cycle is different. NAND flash memory (the storage chips Sandisk makes for phones, PCs, and data centers) has historically been a brutal boom-and-bust business.
The bulls argue that the AI (artificial intelligence) build-out has changed the demand side of that equation. AI inferencing workloads are consuming more storage, suppliers have stayed disciplined about adding capacity, and on this view, supply stays tight through 2027 while today’s extraordinary pricing holds.
Sandisk’s recent results give the bulls plenty to work with. Fiscal third-quarter revenue rose 251% year over year to $5.95 billion, with non-GAAP (adjusted) gross margin reaching 78.4% — figures almost unheard of in the memory industry. The company has also signed five multi-year supply agreements, the first three of which alone carry about $42 billion in minimum contractual revenue, a structure designed to smooth exactly the kind of bust the bears fear. And management guided for $30 to $33 in fiscal fourth-quarter adjusted earnings per share, on revenue of $7.75 billion to $8.25 billion.
Annualize the midpoint of that guidance, and you get about $126 in earnings per share. Against earnings power like that, $3,050 works out to about 24 times earnings. That’s a premium, but not a fantasy, if the pricing holds.
What the $1,620 side believes
Wells Fargo’s target sits nearly on top of the current share price, which makes its message simple: all of this is priced in.
Notably, the firm has been raising its target repeatedly as the stock ran. This week’s move to $1,620 came from $1,250, and it still hasn’t called the shares a buy.
That pattern captures the cautious side’s core belief. The earnings are here today, but NAND prices that tripled on tight supply can retreat once new capacity arrives or buyers pause. And Sandisk’s cost structure means falling prices could hit earnings with the same force rising prices lifted them.
The market itself leans closer to Wells Fargo than to Susquehanna. Sandisk trades at a forward price-to-earnings ratio of about 9.
A single-digit forward multiple on a growth stock still compounding at triple-digit rates is the market saying it doesn’t fully trust the earnings to last. If investors believed the $30-plus quarterly pace of adjusted earnings were durable, the stock wouldn’t be priced like this.
So which side has it right?
Sandisk’s fiscal fourth-quarter report, expected in early August, will show if the guided step-up materializes and if the contract-backed pricing is holding. The quarters after that will test how $42 billion of minimum commitments holds up against the handshake demand of past cycles.
I think patience is key. I’d rather see the August numbers first. If the contract-backed model delivers again, there should be plenty of runway left to buy.
Of course, the wide gap itself is telling investors something, too. This is a high-risk stock with a wide range of possible outcomes.
Should you buy stock in Sandisk right now?
Before you buy stock in Sandisk, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Sandisk wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $377,990!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,269,518!*
Now, it’s worth noting Stock Advisor’s total average return is 896% — a market-crushing outperformance compared to 206% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Wells Fargo is an advertising partner of Motley Fool Money. Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
