Sandisk's AI-Driven Rally Faces Cyclical Reality and Fixed Cost Burden

What happened

A recent Motley Fool article questions if it's too late to buy Sandisk stock, emphasizing its standalone status since 2025 and pricing power from NAND shortages. The DeepValue report confirms Sandisk's stock has surged over 1,600% since early 2025, fueled by AI-driven datacenter demand and tight supply, with Q2 FY2026 revenue hitting $3.025B and datacenter revenue up 64% sequentially. However, SEC filings explicitly warn of NAND's high cyclicality, noting $75M in underutilization charges and $24M in inventory write-downs in 2025, and the company carries quasi-fixed obligations like a $550M annual purchase commitment and $1.165B in Kioxia payments over 2026-2029. The investment thesis recommends a 'WAIT' rating, advising investors to seek an entry near $480 or await proof of durability via Q3 FY2026 results meeting guidance of $4.4B-$4.8B revenue and 65-67% gross margin. Despite the bullish narrative, the crowded sentiment and lack of margin of safety underscore significant downside risks if the cycle turns.

Implication

The stock's dramatic rise prices in an optimistic scenario where NAND tightness and AI demand persist through 2026, but this ignores the industry's inherent cyclicality and Sandisk's elevated fixed costs. Any supply response or demand slowdown could quickly reverse pricing gains, triggering inventory write-downs and underutilization charges similar to 2025. Sandisk's debt from its separation and contractual obligations, like the $550M annual purchase commitment, amplify downside risk in a downturn, limiting financial flexibility. Critical validation points include Q3 FY2026 results hitting revenue and margin targets, plus continued datacenter growth from $440M, as well as monitoring TrendForce pricing updates for signs of weakness. Until these milestones are met or the stock corrects to a more attractive level, the prudent strategy is to remain on the sidelines, as the current setup offers poor risk-adjusted returns.

Thesis delta

The Motley Fool article reiterates the crowded bullish narrative around Sandisk's pricing power and AI benefits, but this does not introduce new fundamental data or alter the core risks identified in filings. The investment thesis remains unchanged, maintaining a 'WAIT' rating with emphasis on avoiding current prices and focusing on execution validation in the coming months.