Sandisk's Strong Results Highlight Cyclical Peak and Unresolved Risks

What happened

Sandisk reported a 31% sequential revenue increase to $3 billion with non-GAAP gross margins at 51% and EPS of $6.20, showcasing extreme cycle leverage. Guidance for the next quarter projects revenue of $4.4-4.8 billion and mid-60% gross margins, implying potential peak profitability driven by AI demand. However, DeepValue filings document past $75 million underutilization charges and $24 million inventory write-downs in 2025, underscoring the volatile, commoditized nature of NAND markets. Free cash flow of $843 million reduced debt to a net cash position, but obligations like a $550 million annual minimum purchase commitment and leverage limit flexibility in a downturn. The market narrative is crowded around AI-driven scarcity, yet durability hinges on contract-backed pricing and hyperscaler conversions, not just spot momentum.

Implication

The strong results and guidance validate near-term upside but do not mitigate underlying cyclical risks, such as potential underutilization charges if pricing normalizes. High gross margins are likely peak-cycle and could erode quickly if enterprise SSD contract pricing resets, as highlighted in filings. Improved cash flow provides a temporary buffer, but fixed obligations and leverage constrain downside flexibility, increasing risk in a downturn. Market optimism is elevated and crowded, amplifying sensitivity to any signs of supply response or weakened contract language. Prudent investors should wait for confirmation of pricing stability through TrendForce updates and hyperscaler production awards before committing capital.

Thesis delta

The news reinforces the bull case for near-term performance but does not shift the core thesis, which remains focused on pricing durability and contract conversions as unproven over the long term. No change is warranted; the 'WAIT' rating persists, as critical checks on FY3Q26 guidance execution and contract language are still pending without evidence of structural change.