Sandisk stock is firing on all cylinders: is a day of reckoning coming?

Sandisk stock price continued its bull run this week, reaching its all-time high amid the ongoing AI boom. SNDK has already jumped by over 600% this year and by over 4,000% in the last 12 months. While this rally may continue, there are substantial risks that it will suffer a strong reversal over time.

Sandisk stock price is benefiting from AI boom

The main reason why the SNDK stock price has surged this year is that the AI boom continues to accelerate this year. We have already seen some top AI companies like Dell and Marvell Technology go parabolic in the past few days after publishing strong earnings.

The same surge is also being seen across other assets. For example, the Roundhill Memory ETF (DRAM) has gained over $15 billion assets since its launch in April this year. It has become the fastest growing ETFs on record. 

The ongoing AI traction has led to a substantial demand for its memory products, especially in the data center industry. This explains why other similar companies like Kioxia and SK Hynix have all jumped to their record highs.

The most recent numbers showed that the company continued growing in the third quarter. It made over $5.9 billion in revenue in the third quarter, up by 97% QoQ and by 251% YoY. This makes it one of the fastest growing companies in Wall Street. 

Investors believe that the company has more room for growth. The average estimate among analysts is that its revenue will jump by 165% this year to $20 billion. It will then make over $42 billion next year and $55 billion a year later. 

Sandisk is a high margin company, with its net profit margin being 35%. This margin will likely continue to grow as long as memory device prices continue rising. As such, if it hits an annual revenue of $50 billion, its net profit margin will be $17.5 billion.

There are signs that the company is not all that overvalued despite the ongoing surge. It has a forward price-to-earnings ratio of 26, slightly higher than the S&P 500 Index’s average of 21.

SNDK stock faces some major risks

Sandisk stock faces some major risks. The first one is that there is a risk that the industry will move from a supply shortage to a surplus in the coming years. This is possible because the industry is nether a monopoly nor a duopoly. Instead, it has many large players like Samsung, SK Hynix, Micron, Kioxiaand Western Digital. These firms will ultimately seek to boost their output to benefit from the soaing prices, a move that will lead to a reversal.

The other risk is that top AI companies are going public this year. This includes companies like OpenAI, SpaceX, and Anthropic. AI stocks will likely jump ahead of the IPOs, and then drop after it happens as investors sell the news.

Technicals also pose some major risks. For one, the SNDK stock price has become highly overbought, with the Relative Strength Index (RSI) and the Stochastic Oscillator moving to their extreme levels. 

SNDK stock chart | Source: TradingView

Sandisk stock also remains above all moving averages, a sign that it may go through a mean reversion soon. These technicals suggest that, while the Sandisk stock rally may continue, there is a risk that it will ultimately plunge.

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