Sandisk stock forms a bearish divergence, enters a risky Wyckoff phase

Sandisk stock price has suffered a harsh reversal recently as the recent bull run hits a wall. SNDK dropped by 14% on Friday, reaching its lowest level since June 11. It has now slumped by 25% this year, even as top Wall Street analysts have maintained their bullish outlook.

Top analysts are bullish on Sandisk stock

Sandisk stock has done well in the past 18 months, making it the best gainer in the S&P 500 Index. It jumped by 4,000% in the last 12 months, with its market capitalization crossing the $300 billion mark.

Despite these gains, analysts are highly bullish on the stock, with most of them hiking their forecasts. In a recent note, Bernstein hiked its target from $2,100 to $2,500, citing the strong demand for memory products after the robust Micron earnings.

Bank of America hiked its target from $1,700 to $3,400, noting that its multi-year contracts were helping it avoid the cyclical issues that have affected the industry in the past. With SNDK trading at $1,745, a surge to $3,000 implies a 71% jump. 

Citigroup has also hiked the target price from $2,025 to $2,500, while Cantor Fitzgerald boosted from $1,800 to $2,900. Other companies that have hiked their targets are Mizuho and Morgan Stanley.

Sandisk’s growth to continue but risks remain

There is a possibility that Sandisk’s revenue growth will accelerate in the coming months as memory prices rise. A recent report showed that DRAM and NAND contract prices rose by 18% and 15% in the second quarter, respectively. While this was a strong growth, it was lower than the 60% experienced in Q1.

Sandisk primarily sells memory equipment like SSDs, memory cards, and USB flash drives. Yet, the cooling DRAM and NAND prices mean that its business too may be affected.

Data shows that analysts are predicting that its revenue jumped by 335% in the last quarter to $8.29 billion. For the year, the revenue is expected to grow by 168% to $19 billion, followed by 141% to $47 billion. These are strong numbers for a company that was spun out by Western Digital last year.

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

The risk, however, is that the soaring memory prices may lead to overproduction, which will affect the global supply. Historically, the memory industry has experienced such periods of strong growth followed by slumps.

On the positive side for Sandisk, its stock is not highly overvalued. Ideally, you would expect a high-margin company growing by triple digits to have high price-to-earnings multiples. In its case, it trades at a forward PE ratio of 26, slightly higher than S&P 500 Index’s 22.

The challenge for Sandisk is that any sign that memory prices are cooling will have a negative impact on its stock. 

Sandisk stock faces technical risks

SNDK stock chart | Source: TradingView

The other risk facing SNDK stock is that its technicals have worsened recently, a sign that it has moved to the distribution phase of the Wyckoff Theory. This phase is then followed by the markdown stage.

The stock’s Relative Strength Index (RSI) has formed a bearish divergence pattern, moving from a high of 81 to 46 today. It also remains much higher than the 100-day moving average, which is at $1,285.

The bearish divergence and a potential mean reversion may push it lower in the near term. On the other hand, a move above the key resistance at $2,360 will invalidate the bearish outlook.