SanDisk's AI-Driven Rally Nears Peak Valuation Amid Cyclical Warnings

What happened

SanDisk stock has surged 35% in a month to $638.52, fueled by accelerating revenue growth and strong AI infrastructure demand as highlighted in a Forbes article. This rally brings the stock close to the DeepValue report's base case implied value of $650, which assumes continued NAND tightness and AI capex translation. However, the report underscores that NAND remains highly cyclical, with FY25 including $75 million in underutilization charges and $24 million in inventory write-downs, contradicting a smooth supercycle narrative. Post-spin, SanDisk carries significant leverage with a $2.0 billion Term Loan B and fixed commitments like a $550 million annual purchase obligation, amplifying downside risks if supply ramps or margins falter. Despite optimistic market sentiment, the lack of structural pricing power and dependency on industry discipline make the current price vulnerable to a rapid cycle reversal.

Implication

The recent rally reflects crowded AI/NAND supercycle optimism, but fundamental analysis reveals elevated cyclical risks and leverage that undermine the bullish narrative. With the stock at $638.52, it trades near the base case value of $650, offering limited upside unless margins sustain above 65% and datacenter growth accelerates beyond current levels. Key monitors include the Q3'26 results against guidance of 65-67% gross margin and industry capex trends, which could trigger a bear case repricing to $520 if supply discipline breaks. The high free float and ongoing Western Digital stake disposal add technical overhang, increasing volatility independent of fundamentals. Therefore, a disciplined approach suggests waiting for a pullback to the attractive entry of $520 or confirmation of sustained margin expansion before adding exposure, as risk-adjusted returns skew negative.

Thesis delta

The Forbes article confirms the market's bullish sentiment but does not alter the core thesis; instead, it highlights the disparity between surface-level optimism and underlying cyclical realities documented in filings. The rally to $640 reinforces the DeepValue report's 'POTENTIAL SELL' rating, as prices now embed perfection in NAND conditions, leaving little room for error amid leverage and fixed commitments.