Earnings Miss High Expectations, Triggering Selloff! SanDisk (SNDK.US) Gets Wall Street's Contrarian Support: Strong Data Center Demand Supports Growth Outlook

Title context: Earnings Miss High Expectations, Triggering Selloff! SanDisk (SNDK.US) Gets Wall Street's Contrarian Support: Strong Data Center Demand Supports Growth Outlook Text: Although SanDisk (SNDK.US) reported better-than-expected results and guidance and announced a stock split, investors appeared to have even higher expectations for the memory chip company, sending the stock down more than 8% in Friday's U.S. premarket session (as of publication). Still, Wall Street analysts affirmed SanDisk's latest results and its commitment to returning excess cash to shareholders, even as some analysts cut their price targets on the stock. RBC Capital analyst Srini Pajjuri cut his price target on SanDisk to $1,400 from $1,600, citing contracting earnings multiples in the sector. However, he said the company's results and outlook remain strong, and firming NAND prices are also providing a tailwind. "Looking ahead, we expect strong demand from AI inference/KV cache applications to persist, though a soft PC/smartphone market will create some headwinds. We are raising our earnings estimates. At roughly 5.2x FY2028 EPS, we view the risk/reward as roughly balanced, as strong generative AI demand, tight supply and solid cash returns will be offset by slowing ASP growth and a weak PC/smartphone market," Srini Pajjuri wrote in a note to clients. JPMorgan analyst Harlan Sur maintained his $2,250 price target and "Overweight" rating on SanDisk, noting that data center demand is still accelerating. "By end market, data center remains the company's clear growth engine (about 44% of revenue and rising). Management expects calendar 2027 data center bit demand to grow about 40% year over year (after more than doubling in 2026), at which point the business will account for more than 55% of total NAND industry bit demand," the analyst explained. Looking further, Harlan Sur said SanDisk kept unchanged the quantitative guidance it gave last quarter, as the company expects about 50% of FY2027 bit output and about 66% of FY2028 bit output to be covered by new business model agreements. However, the company made clear that the two new business model (NBM) agreements signed in the first fiscal quarter had already been publicly disclosed. "Overall, we believe tonight's results are further evidence that a higher data center mix and longer-duration customer agreements can support more durable profitability. In addition, new products such as HBF (first tape-out completed in the first fiscal quarter, with product samples targeted for calendar 2027) could still bring upside to the company's long-term business model," Harlan Sur said. Morgan Stanley analyst Joseph Moore maintained his $1,750 price target on SanDisk, raised his 2027 earnings estimates and has an "Overweight" rating on the stock. He noted that with the stock now trading below 5x earnings, its risk/reward "remains attractive." "The results remain very strong, and the durability of that strength is increasing, which keeps us positive," Joseph Moore said. "Across the memory chip sector, persistently strong fundamentals are becoming less of a surprise, and the debate among investors is now shifting to how long this upcycle can last. So, despite SanDisk delivering a high-quality beat and raise this quarter (EPS 7% above expectations, guidance 4% above consensus), it is not obvious whether there has been any underlying improvement in NAND market conditions, given that the market is effectively still in a state of demand exceeding supply, with capacity almost entirely sold out, over a multi-year horizon." Results Review The report showed that, boosted by surging NAND flash demand driven by artificial intelligence (AI) infrastructure buildout and rising product prices, SanDisk's first-quarter fiscal 2027 revenue reached $11.031 billion, up 378% year over year and 23% quarter over quarter. Adjusted earnings per share were $49.51, up about 26% from $39.25 in the prior quarter and compared with $1.22 a year earlier. Adjusted gross margin reached 85.1%, up 55.2 percentage points from 29.9% a year earlier and 0.5 percentage points from 84.6% in the prior quarter. The data center business became SanDisk's fastest-growing segment, with revenue of $4.8 billion, up 61% from the prior quarter and up 1,682% year over year, outpacing the company's estimate of overall market growth for the quarter. SanDisk said that as AI infrastructure continues to expand, demand from data centers for high-performance enterprise SSDs and high-capacity storage platforms is growing rapidly. The company allocated more product supply to the data center market in the first fiscal quarter to meet growing customer demand. The company noted that customer partnerships, including with three U.S. hyperscale cloud service providers, support the continued expansion of the data center business. Beyond near-term results, the long-term customer cooperation arrangements SanDisk disclosed also deserve attention. The company said that as of the end of the first fiscal quarter, it had signed new business model agreements with eight customers in the data center and edge computing fields. Based on contractually agreed minimum prices, these agreements correspond to minimum contracted revenue of $93.9 billion. Of that, remaining performance obligations at quarter-end were $88.9 billion, and total financial guarantees in the form of related cash deposits and financial instruments reached $16.5 billion. SanDisk noted that demand signals from customers already extend beyond fiscal 2030, and recent engagement with leading AI companies also indicates room for further demand growth. Notably, the company said demand covered by its long-term agreement backlog already exceeds its supply capacity through the end of this decade. On capital returns, SanDisk spent $5 billion in the first fiscal quarter to repurchase about 3.2 million shares. Together with $4.5 billion of buybacks in the prior quarter, the company has deployed $9.5 billion on share repurchases over the past two quarters, repurchasing about 6 million shares in total, equivalent to about 4% of shares outstanding. As of the end of the first fiscal quarter, the company had $10.5 billion remaining under its share repurchase program. SanDisk said it will continue to prioritize investing in the business and maintaining a strong balance sheet, while planning to return all excess cash to shareholders. In addition, SanDisk's board approved a 1-for-8 stock split. Under the arrangement, the additional shares are expected to be distributed on November 19, and split-adjusted shares are expected to begin trading on November 20. For the second quarter of fiscal 2027, SanDisk expects revenue of between $12.2 billion and $12.6 billion, which at the midpoint of $12.4 billion would represent about 12% growth from $11.031 billion in the first fiscal quarter; it expects second-quarter GAAP gross margin of 84.4% to 85.4% and non-GAAP gross margin of 84.5% to 85.5%, implying profitability is expected to remain at a high level; and it expects second-quarter adjusted earnings per share of $55 to $57, which at the midpoint of $56 would represent about 13% growth from $49.51 in the first fiscal quarter. On the subsequent market outlook, SanDisk said structural demand growth from AI infrastructure buildout and the expanding use of NAND flash in AI inference will continue to support the memory industry. The company expects the NAND market to remain strong in 2027, with the data center business remaining the primary growth engine.