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Three years back, Sandisk (NASDAQ:SNDK) was selling flash memory for less than it cost to make. In its fiscal fourth quarter, which ended in early July, it made around 85 cents of gross profit on every dollar of sales.
Most of the gap between the two periods boils down to the price of flash memory. And as Sandisk goes into its fiscal first-quarter report on Thursday, Oct. 29, the price increases fueling its boom are already slowing.
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At around $1,640 as I write, the growth stock is about 30% off its 52-week high of about $2,354.
In the fiscal year ending June 30, 2023 (fiscal 2023), Sandisk was still the flash memory unit inside Western Digital. Its revenue shrank 38% that year to around $6.1 billion. According to the Form 10 registration statement Sandisk filed before its 2025 spin-off, substantially all of that decline came from a 39% drop in its average selling price per gigabyte. Because prices fell about as much as sales did, the amount of storage Sandisk sold hardly changed.
But profits fell far harder. Gross margin sank from 33.3% in fiscal 2022 to 7.1% in fiscal 2023, and the quarterly trend was even steeper. Gross margin was around 24% in the quarter ending in September 2022, about 14% in the December quarter, and below zero in the March 2023 quarter -- where it stayed through the quarter ending in September 2023.
In other words, a revenue decline of about 24% between the September 2022 and March 2023 quarters was enough to wipe out Sandisk's gross profit. Fiscal 2023 closed with a net loss of around $2.1 billion. If prices turn again, I'd expect gross margin to show it well before revenue does.
"In '23, we are having very different earnings calls than we're having now," CEO David Goeckeler said on Sandisk's fiscal fourth-quarter call in August.
Showing how much of the recent boom came from pricing, Sandisk's fiscal Q4 2026 revenue (the three months ended July 3) climbed 51% sequentially to $8.97 billion, and management said around two-thirds of the gain came from higher prices. Gross margin went from 50.9% in fiscal Q2 to 78.4% a quarter later, then to 84.6%.
The guidance for fiscal Q1 2027 (roughly July to September) suggests a slowdown. Management sees revenue of $10.3 billion to $10.8 billion, around 15% to 20% over fiscal Q4.
This gain should come from both more storage shipped and "modest price increases," CFO Luis Visoso said on the call. And Sandisk forecast non-GAAP (adjusted) gross margin of 83% to 85%, around where fiscal Q4 was.
Of course, slower price increases aren't the same as falling prices, and Sandisk's own guidance still calls for prices to rise. Industry tracker TrendForce even expects NAND flash contract prices to climb another 15% to 20% in the October-to-December quarter, which covers most of Sandisk's fiscal Q2.
The first thing I'd check is whether pricing still adds to Sandisk's sequential revenue growth, like it did in fiscal Q4. A quarter when higher volume needs to make up for lower prices might mean flash prices have already turned.
The second is gross margin, both for fiscal Q1 and in the fiscal Q2 guidance. A fiscal Q2 guide meaningfully under the 83%-to-85% range might matter more than any revenue number, because margins dropped much faster than sales in the last downturn.
True, Sandisk has more protection now. Management expects its multiyear New Business Model agreements, whose variable pricing is subject to floors and ceilings, to cover around half the storage it ships in fiscal 2027. At floor pricing, the signed agreements carry at least $93.9 billion in revenue. But the rest of Sandisk's output still sells at market prices, and no downturn has tested these floors yet.
The stock already reflects some of this risk. Annualize the $45 midpoint of Sandisk's fiscal Q1 adjusted earnings-per-share guidance, and shares trade at around 9 times these earnings. At a price-to-earnings ratio that low, investors seem to expect today's profits to drop eventually.
I think this caution is sensible. Sandisk's business arguably looks far stronger than it did in fiscal 2023, with a much bigger data center business and supply contracts it didn't have then. But its own guidance shows gross margin flattening out, and the last downturn brought that margin from around 24% to below zero in two quarters. I'd want to see the margin hold through a quarter with falling flash prices before buying the stock.
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Sandisk's Sales Fell 38% in the Last Flash Memory Downturn, and Its Oct. 29 Report Is the Next Test was originally published by The Motley Fool
