To The Moon

Sandisk’s FY2026 Q4 results were exceptional. The stock still fell about 3% after hours because FY2027 Q1 revenue guidance missed elevated expectations.

How's Q4?

Q4 revenue reached $8.97B, up 51% QoQ and 372% YoY. It beat the $8.71B consensus and Goldman Sachs’ $8.84B estimate. Non-GAAP gross margin was 84.6%, versus 83.6% consensus, while adjusted EPS of $39.25 beat consensus by 10.7%.

The operating leverage was unusually strong. Revenue rose from roughly $1.9B a year ago to almost $9B, while cost of revenue stayed near $1.38B. Operating expenses increased only about 20%, driving operating income above $7B. Adjusted free cash flow reached $5.04B, equal to 56% of revenue.

Data centre demand drove the quarter. Segment revenue reached $2.98B, about 14 times the prior-year level. Edge remained the largest business at $5.43B, while Consumer fell about 5% to $556M.

Data centre also increased from 12% of Sandisk’s bit shipments a year ago to 38% at the end of FY2026. This mix shift matters because AI inference, model storage and KV-cache workloads require large amounts of frequently accessed flash storage.

Sandisk has started revenue shipments of its QLC Stargate platform. BiCS node transitions and HBF could improve storage density, cost per terabyte and performance, although management has not provided firm HBF launch or revenue dates.

Contract visibility has improved sharply. Sandisk now has new business model agreements with eight Data Centre and Edge customers, up from five last quarter. Minimum expected revenue at floor prices more than doubled from $42B to $93.9B, supported by $16.5B of financial guarantees. Management expects these agreements to generate gross margins of around 80%.

The company estimates the NAND market will exceed $300B in 2026 and approach $500B in 2027. Customer demand is growing faster than supply, and management expects bit allocation to continue beyond 2027. Sandisk plans to grow bit output by the mid-to-high teens while broadly maintaining market share.

The near-term outlook was where expectations broke down

For FY2027 Q1, Sandisk guided revenue to $10.3B–$10.8B. The $10.55B midpoint is 5.4% below the $11.15B consensus and 9.5% below Goldman’s $11.65B estimate.

Gross-margin guidance of 83%–85% implies an 84% midpoint, below the 86.7% consensus. Adjusted EPS guidance of $44–$46 is close to the $45.34 consensus but below Goldman’s $49.95 estimate.

The guide still implies approximately 18% sequential revenue growth and 15% EPS growth. Part of the revenue gap reflects higher planned inventory days. Sandisk is retaining more inventory to support its long-term agreements, temporarily reducing sellable bits. Management expects both volume and pricing to increase during Q1.

Consumer demand remains weaker. Management expects smartphone and PC unit shipments to decline by the mid-teens this year before exabyte growth recovers next year. The long-term agreements mainly cover Data Centre and Edge customers, so they provide limited protection for the Consumer segment.

Capital returns are another positive. Sandisk spent $4.5B repurchasing 2.84M shares during Q4. The board added a $14B programme, taking the remaining authorisation to $15.5B. Management currently prefers buybacks over dividends.

At roughly 6.7 times estimated FY2027 earnings, SNDK appears inexpensive. The multiple, however, is based on NAND pricing and margins near cyclical highs. An 84.6% gross margin is unlikely to be permanent.

Even modest normalisation could change the valuation quickly. One stress scenario assumes a 20% price decline and a still-strong 40% operating margin. Annualised operating income would fall toward $11.2B, implying a price-to-operating-income ratio near 18 times. A return to 10%–20% margins would create substantially more downside.

Goldman remains bullish, with a $2,200 target based on 20 times normalised EPS of $110. Against the referenced share price of $1,427.62, that implies 54% upside. The bull case requires sustained hyperscaler capex, tight NAND supply, successful contract execution and margins holding near 80%.

My view is closer to Hold. Demand remains strong, contract coverage is improving, and there is no clear evidence of oversupply. The main risk is earnings normalisation: NAND supply can recover, hyperscaler capex can slow, and pricing can reverse faster than revenue contracts adjust.

The next key indicators are NAND pricing, Data Centre mix, contract conversion, inventory days and gross-margin retention. SNDK still has strong fundamentals, but the low P/E alone does not provide enough protection if current margins represent the cycle’s peak.

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