AI Data Center Demand And BiCS8 Transition Will Drive Long-Term Earnings Power

Catalysts

About Sandisk

Sandisk develops and manufactures NAND flash based storage solutions for data center, edge devices and consumer markets worldwide.

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

• Rapid AI and cloud workload expansion is driving data center NAND exabyte growth at a pace well above overall supply. This positions Sandisk's enterprise SSD portfolio and deepening hyperscaler engagements to support sustained revenue acceleration and structurally higher pricing power, benefiting earnings.
• The ramp of BiCS8 to a majority of bit production by the end of fiscal 2026 should materially improve density and energy efficiency. This enables mix shift into higher value enterprise drives and lowers unit costs, which supports gross margin expansion and stronger net margins.
• Ongoing edge device upgrades, including PC refresh driven by Windows 11 adoption and premium smartphones adding more AI features, are increasing storage content per unit. This should translate into steady bit demand growth and more resilient, diversified revenue across cycles.
• Shift in NAND demand mix toward higher performance enterprise and storage class SSDs, including QLC based high-capacity drives like Stargate, creates an opportunity for Sandisk to gain share in the fastest growing segment of the market. This supports above market revenue growth and improved operating leverage.
• Tight industry supply with fabs now at full utilization and customer products on allocation allows Sandisk to prioritize strategic long-term partners. This should sustain favorable pricing, optimize mix toward higher margin segments and support robust free cash flow generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Sandisk's revenue will grow by 19.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -22.4% today to 22.9% in 3 years time.
• Analysts expect earnings to reach $3.1 billion (and earnings per share of $18.12) by about December 2028, up from $-1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.6 billion in earnings, and the most bearish expecting $1.6 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 19.8x on those 2028 earnings, up from -17.4x today. This future PE is lower than the current PE for the US Tech industry at 24.3x.
• 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 8.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current supply constrained environment and product allocation across all end markets may encourage the broader NAND industry to add wafer capacity or accelerate node transitions. This could eventually swing the market back into oversupply, driving down pricing and compressing revenue and gross margins over the medium term.
• Sandisk is investing heavily in BiCS8, HBF and enterprise SSD ramps while guiding high teens bit demand growth. However, if AI and data center exabyte growth normalizes from the current mid 40% forecast or customers overestimate their long-term needs, the company could be left with elevated capital intensity and underutilized assets, pressuring earnings and free cash flow.
• Management is counting on gaining share in enterprise and data center SSDs from a currently underrepresented position. Yet qualification cycles are long and hyperscalers are simultaneously engaging multiple suppliers, so slower than expected share gains would limit operating leverage and keep net margins below the targeted expansion path.
• The edge and consumer businesses rely on low to mid single digit unit growth in PCs and smartphones and high single to double digit growth in NAND content per device. A weaker macro backdrop, slower AI adoption at the device level or longer replacement cycles could dampen bit demand, weighing on diversified revenue growth and constraining margin improvement.
• Sandisk is moving toward longer term volume and price discussions with a concentrated set of large hyperscale customers. If these agreements lock in pricing that does not fully reflect future cost or demand volatility, or if customer bargaining power increases as more supply comes online, the company could face structurally lower pricing power and constrained gross margin and earnings growth.

Valuation

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

• The analysts have a consensus price target of $264.95 for Sandisk based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 analysts, you'd need to believe that by 2028, revenues will be $13.3 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $206.18, the analyst price target of $264.95 is 22.2% 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.