AI Data Center Demand And Rising Storage Intensity Will Drive Significant Long Term Upside

Catalysts

About Sandisk

Sandisk designs and manufactures advanced NAND flash storage solutions for data center, edge and consumer applications worldwide.

What are the underlying business or industry changes driving this perspective?

• Accelerating AI infrastructure and data center build-outs are driving rapid enterprise SSD adoption, positioning Sandisk to outgrow a data center market where exabyte demand is expected to rise from the high 300s in 2026. This is expected to support robust multi-year revenue and earnings expansion.
• The ramp of BiCS8 as the majority of bit production by fiscal year 2026 materially lifts bits per wafer, improves energy efficiency and performance, and should translate into structurally higher gross margins and stronger free cash flow.
• Customer behavior is shifting toward multi-quarter and potential multiyear supply commitments as NAND remains supply constrained. This can enhance pricing power, revenue visibility and reduce earnings volatility.
• Rising storage intensity in PCs and premium smartphones, supported by AI-enabled device upgrades and higher capacity per unit, underpins steady bit growth in edge markets. This supports diversified revenue growth and healthier net margins through cycles.
• The mix shift toward high value enterprise SSDs and QLC-based ultra-high-capacity drives, combined with full fab utilization and disciplined CapEx, supports sustained gross margin expansion and increasing earnings leverage on incremental revenue.

Assumptions

This narrative explores a more optimistic perspective on Sandisk compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Sandisk's revenue will grow by 31.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -22.4% today to 32.0% in 3 years time.
• The bullish analysts expect earnings to reach $5.7 billion (and earnings per share of $33.3) by about December 2028, up from $-1.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.7 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from -21.1x today. This future PE is lower than the current PE for the US Tech industry at 23.5x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.31%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current supply constrained environment and double digit pricing increases for NAND may prove temporary as industry participants eventually add wafer capacity or accelerate node transitions, which could swing the market back into oversupply, pressure ASPs and lead to lower revenue and gross margins over the long term.
• Sandisk is ramping BiCS8 and planning significant capital investments based on an assumption that bit demand will compound at mid to high teens for many years. However, if AI infrastructure spending or data center exabyte growth normalizes below these levels, the company could be left with excess capacity, elevated depreciation and weaker earnings and free cash flow.
• The narrative relies heavily on Sandisk scaling its underrepresented data center enterprise SSD business and winning long term hyperscaler qualifications. Yet extended qualification cycles, stronger competitors or a slower than expected mix shift toward high capacity QLC drives could cap market share gains and limit upside to revenue and net margins.
• Edge and consumer markets such as PCs and smartphones are expected to deliver steady unit and content growth. However, secular saturation in devices, weaker AI driven upgrade cycles or macro slowdowns in discretionary spending could reduce storage intensity growth and seasonal demand, negatively impacting revenue diversification and earnings stability.
• The strategy to concentrate more bits with strategic customers, run fabs at full utilization and reduce inventory days increases dependence on a small set of large hyperscale and OEM buyers. Any change in their procurement strategies, pricing power or technology preferences could therefore amplify cyclicality in revenue and compress operating margins and earnings over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Sandisk is $322.0, which represents up to two standard deviations above the consensus price target of $264.95. This valuation is based on what can be assumed as the expectations of Sandisk's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $322.0, and the most bearish reporting a price target of just $135.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $17.7 billion, earnings will come to $5.7 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $250.05, the analyst price target of $322.0 is 22.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.