Sandisk's Record Quarter Meets a Warning on Memory Pricing

Sandisk delivered a quarter strong enough to raise its guidance, yet the shares fell more than 4% in Friday premarket trading as investors confronted a harder question: how long can today's extraordinary NAND memory pricing last? Fiscal first-quarter revenue reached $11.031 billion, up 23% from the previous quarter and 378% from a year earlier. GAAP gross margin was 85.0%, GAAP net income was $8.101 billion, and non-GAAP diluted earnings were $49.51 a share. The original report incorrectly compared that adjusted figure with $46.67 a year earlier. Sandisk's release shows the correct comparisons were $39.25 in the preceding quarter and $1.22 in the year-earlier quarter. Data-center revenue was the main engine, rising 61% sequentially to $4.802 billion. Edge revenue increased 7% to $5.832 billion, while consumer revenue fell 29% to $397 million as buyers adjusted to higher prices. Management said roughly 60% of the sequential revenue increase came from volume and 40% from pricing. That mix shows demand is still expanding, but it also gives investors a cleaner way to separate unit growth from price inflation. The near-term outlook remains powerful. Sandisk guided fiscal second-quarter revenue to $12.2 billion to $12.6 billion and non-GAAP diluted earnings to $55 to $57 a share, both on a pre-split basis. It expects non-GAAP gross margin of 84.5% to 85.5%. The company generated $5.7 billion of adjusted free cash flow in the first quarter, a margin of about 52%, ended with $5.1 billion of cash and no debt, and repurchased about $5 billion of stock during the period. Gross capital spending was $378 million, or 3.4% of revenue, and management expects it to reach a mid-single-digit percentage of revenue for the full fiscal year. That leaves current expansion largely funded by internally generated cash. Morningstar's concern is not that AI demand suddenly disappears. The research firm argues that NAND price growth is decelerating sooner than it expected and that additional industry capacity from 2027 through 2029 could eventually push the market into another downcycle. It lowered its fair value estimate for Sandisk to $870 from $1,000, according to Stocktwits, about 35% below Thursday's closing price. That countercase deserves attention because NAND remains a cyclical product even when end demand grows. A supplier can sell more bits and still suffer a sharp earnings decline if industry capacity expands faster than demand and prices fall. Morningstar also argues that China's memory expansion adds supply risk for U.S. producers. Long-term customer agreements can soften that cycle, but they do not eliminate it. Sandisk's annual filing says its nonbinding memorandums with customers may include fixed or variable pricing and warns that counterparties may fail to perform. Morningstar goes further, arguing that customers could seek to renegotiate or leave agreements if spot prices fall below contract terms. That is an analyst view, not an established outcome, but it explains why the market may discount current margins despite the company's guidance. The company's eight-for-one stock split does not change this valuation debate. Shareholders of record on November 9 are due seven additional shares for each share held after the November 19 close, with split-adjusted trading expected to begin November 20. The split changes the price per share, not the company's market value or each holder's ownership percentage. The investment question is therefore less about whether the first quarter was strong. It was. The question is whether volume growth, long-term agreements and data-center demand can keep earnings high after new supply arrives. Sandisk's second-quarter guidance supports the bull case for the next few months. Morningstar's lower fair value and pricing-peak warning put the burden on management to show that today's margins can survive the next change in the memory cycle.