Earnings Report Preview | After a 47% plummet in July, is the earnings report a major test for SanDisk (SNDK.US)? Can it prove the "misjudgment" with AI demand?

Storage chip giant SanDisk (SNDK.US) will release its fourth quarter and full-year results for fiscal year 2026 after the market closes on Wednesday (August 5) Eastern Time. The market is closely watching whether the strong demand for AI infrastructure can continue to drive NAND flash sales, profit margins, and earnings growth. This earnings report comes amid significant fluctuations in SanDisk's stock price. Despite benefiting from rising demand for data center storage and constrained NAND supply, SanDisk's stock faced a sharp decline in July as investors concentrated on reducing holdings in some of this year's strongest-performing memory chip stocks. Performance guidance points to another quarter of rapid growth after last quarter's impressive results established a high baseline. SanDisk officially estimates that revenue for the fourth quarter will be between $7.75 billion and $8.25 billion. Calculating the midpoint of $8 billion, this represents a quarter-over-quarter increase of approximately 34%, soaring over 320% compared to $1.9 billion in the same quarter of fiscal year 2025. The company forecasts that the non-GAAP diluted earnings per share for the fourth quarter will be between $30 and $33, whereas the adjusted earnings per share for the same period last year was only $0.29. Meanwhile, the non-GAAP gross margin is expected to be between 79% and 81%. Some market predictions even exceed the company's official guidance. According to a third-party earnings data platform, analysts currently expect revenue to be around $8.42 billion and adjusted earnings per share to be approximately $34.67. This implies that investors might anticipate SanDisk's final performance not only meeting the expectations but possibly exceeding the upper limit of the guidance. However, such high market expectations also mean that even if the company delivers a solid "report card," any conservative outlook for the new fiscal year could still put downward pressure on the stock price. SanDisk's performance in the third quarter has been remarkable: revenue reached $5.95 billion, a quarter-over-quarter increase of 97% and a year-over-year surge of 251%; adjusted earnings per share rose to $23.41; GAAP net profit reached $3.62 billion. The gross margin expanded to 78.4% for the quarter, compared to 50.9% in the previous quarter and only 22.5% in the same period last year. The substantial improvement in gross margin was primarily due to higher NAND prices and the shift in product structure toward high-value customers and markets. In terms of business segments, third-quarter revenue from data centers reached $1.47 billion, a staggering quarter-over-quarter increase of 233% and a year-over-year surge of 645%; revenue from edge business soared by 295% year-over-year to $3.66 billion; consumer business revenue increased by 44% year-over-year to $820 million, but fell by 10% quarter-over-quarter. In terms of cash flow, operating cash flow for the quarter was $3.04 billion, with cash on hand of $3.74 billion at the end of the period, and the company has cleared all long-term debts by the end of the quarter. NAND pricing and long-term contracts are key variables in the market expectations following a significant drop in July. The demand for high-speed, durable storage in AI workloads has significantly bolstered the sales of enterprise-grade solid-state drives and high-end NAND products. SanDisk stands to benefit immensely from this trend, while industry-wide capacity constraints further enhance pricing power and profit margins. Investors will closely monitor whether data center revenue continues its rapid expansion in the fourth quarter, and if rising average selling prices continue to support exceptional gross margins. Additionally, management comments on procurement dynamics from cloud service providers, enterprise SSD shipment volumes, and progress on the next generation of BiCS technology will help assess the sustainability of the current growth momentum. Long-term customer agreements present another major focus. As of the end of the third quarter, SanDisk had signed three long-term agreements under a new business model, with two more added in the fourth quarter. These multi-year arrangements include firmer financial commitments aimed at enhancing revenue predictability while reducing the inherent cyclical volatility in the storage industry. Therefore, management's commentary on the coverage of contracts for fiscal year 2027, manufacturing capacity, and the partnership with Kioxia may hold importance similar to the "numbers on the books" for quarterly performance. SanDisk's stock price closed at $1,214.83 on July 31, down approximately 5.2% for the day. Over the course of July, the stock experienced a cumulative drop of about 47%, marking its worst single-month performance since re-entering the public trading market as an independent company in February 2025, after a period of exceptionally strong price increases. The concentrated sell-off in July indicates that investors have become cautious regarding high valuations and crowded AI-themed trades. However, the stock price pullback has somewhat alleviated the valuation pressure ahead of the earnings report. If this performance results in revenue exceeding expectations, gross margins surpassing 81%, and an optimistic outlook for fiscal year 2027, SanDisk's stock price is expected to experience a rebound. Conversely, if NAND pricing weakens, data center orders slow down, or if management adopts a more conservative stance, even with substantial year-over-year increases, the recent downward trend may continue.