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Last week, the Nasdaq Composite index briefly dipped into correction territory, falling more than 10% from its peak as prices for artificial intelligence (AI)-related stocks plummeted. Sandisk (NASDAQ: SNDK), a leader in memory and storage, has dropped 64% from its June highs, following a period where its value increased more than tenfold.
Sandisk management has arranged for a stock split to occur on Nov. 19. Although the flash memory manufacturer currently displays a seemingly inexpensive price-to-earnings ratio (P/E), it may actually be the most costly purchase available today. Below is my reasoning for avoiding Sandisk shares despite the recent price decline and the impending split.
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Strong trailing financials amid the AI boom
Western Digital acquired SanDisk in 2016 but subsequently spun it off under a slightly altered name in early 2025. Since that separation, the accelerated expansion of AI infrastructure has triggered a substantial surge in demand and a severe global shortage of memory chips. Consequently, Sandisk and its competitors have been able to significantly increase their prices.
In the previous quarter, revenue reached $11 billion, marking a 378% year-over-year increase, with a gross margin of 85%. In contrast, gross margins were under 30% during the same quarter a year earlier. This boom resulted in substantial earnings growth, generating $8.78 billion in earnings last quarter alone, compared to barely breaking even a year prior.
This earnings inflection point previously drove Sandisk stock up by over 6,000% since Western Digital spun it off. Currently, however, it has declined by more than half from that peak alongside the Nasdaq correction.
A cyclical memory market
Numerous news developments have emerged since Sandisk's stock peaked in June, causing investor anxiety regarding the AI infrastructure theme.
OpenAI delayed its IPO. Neoclouds like CoreWeave are reportedly struggling to raise funds in the debt markets. The midterm elections might exert broad effects on AI regulation and the speed of data center construction.
Reduced capital flowing into AI companies means less spending on memory chips from Sandisk. This narrative has gained traction on Wall Street, contributing to the decline in Sandisk's stock price.
When Sandisk reported its fiscal 2027 first-quarter results on Oct. 29, management projected sequential revenue growth of approximately 10% for fiscal Q2. This indicates that memory demand is still expanding, albeit at a slower pace than the 23% sequential growth seen in fiscal Q1. Wall Street typically dislikes slowing revenue growth.
SNDK Revenue (TTM) data by YCharts.
Why I wouldn't buy Sandisk stock even at a cheap forward earnings multiple
Sandisk and its rivals are currently constructing new facilities to produce more memory and capture a larger share of the growing market. Eventually, as this additional production becomes operational in the coming quarters and years, the supply of memory chips will likely return to balance with demand. It could potentially surpass demand, leading to a glut, which would cause trouble for Sandisk and its peers.
Sandisk's capacity to execute significant price hikes across its product lines over the past year and a half has driven massive earnings growth. The dramatic shift in its gross margins highlights the extreme cyclicality of the memory chip market. Historically, the sector has endured many cycles of high demand and prices followed by equally steep declines as supply-and-demand dynamics reversed. I do not anticipate this instance being different.
For investors, the stock split serves no purpose. It merely increases the total number of shares outstanding without altering the stock's valuation or the underlying business. Never purchase shares in a company solely due to a stock split.
At present, Sandisk trades at what appears to be a very low forward price-to-earnings ratio (P/E) of 3.5. It is feasible that Sandisk will achieve the expected earnings level upon which this ratio is based over the next 12 months. Nevertheless, over a longer timeframe, a downturn in the memory chip market could drastically impact this earnings ratio.
If Sandisk's annualized revenues revert to $10 billion (which was the figure reported less than a year ago) and its operating margin drops from 73% to 10% as it loses its shortage-driven pricing power, its earnings would decrease to $1 billion. This would result in a P/E ratio of 100 relative to the current market cap of approximately $100 billion. This makes Sandisk stock appear extremely expensive for anyone considering holding it beyond the next few quarters.
Should you buy stock in Sandisk right now?
Before purchasing Sandisk stock, consider this:
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Western Digital. The Motley Fool has a disclosure policy.
Sandisk Stock Has Collapsed by 65%, but It's Still Undergoing an 8-for-1 Stock Split on Nov. 19. Here's Why I'm Still Not Buying Shares Amidst This Nasdaq Market Slump. was originally published by The Motley Fool
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