Earnings blowout, but why did SanDisk (SNDK.US) plunge overnight?

Title context: Earnings blowout, but why did SanDisk (SNDK.US) plunge overnight? Text: SanDisk delivered a comprehensively better-than-expected earnings report, yet its stock plunged as much as 8% in Friday's U.S. premarket session. The problem lies with its Japanese wafer fab partner Kioxia: the latter's profit guidance fell short of expectations and warned that the AI-driven NAND flash price surge is cooling. SanDisk's Thursday after-hours report card was almost flawless: revenue and EPS beat expectations, gross margin of 85%, guidance above Wall Street forecasts, plus an additional US$5 billion buyback and a announced 1-for-8 stock split. But the stock didn't budge after hours. At 5:54 a.m. Eastern Time on Friday, Bloomberg reported Kioxia's guidance, and SanDisk fell as much as to US$1,197.57 premarket, down 16% from Wednesday's high of US$1,419. Micron Technology, Inc. (MU.US) moved lower in tandem. One analyst noted: "In the memory industry, the only number that matters is the second derivative." In other words, what the market cares about right now is how fast prices are rising. Data shows NAND flash average selling prices rose about 25% in the three months ended September, compared with a 70% increase in the prior quarter. Kioxia: The price surge is beginning to level off Kioxia expects operating profit of JPY2 trillion (about US$12.7 billion) for the current quarter, far below the market consensus of JPY2.35 trillion. The just-completed September quarter was still stellar: operating profit rose 22-fold year-on-year to JPY1.99 trillion, in line with expectations; revenue was about JPY2.48 trillion, up 40% quarter-on-quarter. The company also paid an interim dividend for the first time, at JPY90 per share. The trouble is the next quarter. Based on the above analysis's calculation, the JPY2 trillion guidance implies almost zero quarter-on-quarter operating profit growth in the December quarter, versus 57% growth in the September quarter, while the market consensus had originally factored in about an 18% increase. Bloomberg's Takashi Mochizuki analyzed that Kioxia's outlook indicates the unprecedented price surge of the past year or so is beginning to level off. In other words, prices are still rising, but at only about one-third the pace of three months ago. The analysis holds that for stocks priced on the assumption that "the curve will only get steeper," that is enough to constitute a negative. Customers are also starting to buckle. According to media reports, Kioxia executives have warned against excessive price hikes to avoid alienating customers. Intel Corporation (INTC.US) on Friday projected PC shipments will fall about 12% this year and another roughly 10% in 2027, with "constrained memory supply" cited as one reason; the company blamed memory prices for a "surprisingly severe PC correction," and its stock plunged 25% premarket. The selloff spread quickly. JPMorgan's (JPM.US) market intelligence team said the memory ETF (DRAM) fell 5.6% premarket, with concerns about AI monetization resurfacing and the entire semiconductor sector under pressure. Just two days earlier, index futures were rising amid a "SK Hynix-led memory frenzy." Kioxia's own stock had already fallen about 60% from its June high before the earnings. Jay Narain of Goldman Sachs Group, Inc. (GS.US) noted that even so, its cumulative return since its December 2024 IPO is still 2,400%. SanDisk: Beat market expectations, but not buy-side expectations On the numbers alone, SanDisk had a solid quarter. According to a summary by Goldman Sachs Group, Inc.'s TMT trading desk, SanDisk revenue was US$11.03 billion, above the market expectation of US$10.74 billion; gross margin was 85.1%, slightly above the market expectation of 84.9%; non-GAAP EPS was US$49.51, above the market expectation of US$46.73. The problem lies in the details of the guidance. SanDisk's next-quarter revenue guidance midpoint of US$12.4 billion and non-GAAP EPS of US$55 to US$57 were above the market consensus of US$12.08 billion and US$52.94, but clearly below Goldman Sachs Group, Inc.'s forecasts of US$13.55 billion and US$59.71. The analysis holds that Goldman Sachs Group, Inc.'s numbers roughly represent the buy side's private "whisper expectations," that is, the level institutional investors were actually hoping for. Management is quite optimistic about the data center business. SanDisk said data centers already account for about half of industry bit demand, versus about 20% in 2020; the company expects that by 2030, KV cache (the cache that stores intermediate computation results during large-model inference) will account for about 35% of the AI data center market, and that data centers will account for more than 55% of the NAND market by 2027. Management also said multiple customers "had previously underestimated their NAND demand," and SanDisk will supply at "renegotiated higher prices." As for how much higher, Kioxia, which shares a wafer fab with SanDisk, just gave the answer: much less than before. This scene already played out once in August, when SanDisk likewise comprehensively beat expectations and the stock still fell. Goldman Sachs Group, Inc. analyst Jim Schneider's earnings review shows long-term agreements currently cover about 50% of SanDisk's planned bit capacity for fiscal 2027 and 65% for fiscal 2028, unchanged from August, despite two more signed in the interim (10 agreements with 8 customers to date). Long-term agreements set price floors and provide a buffer. But the above analysis notes this means half of next year's capacity will still float with contract market prices, and Kioxia just clarified the direction of the contract market. Schneider remains bullish. He believes the NAND market has "very limited supply growth for the foreseeable future," raised his 2026-2028 EPS forecasts by about 7%, and noted the company still has US$10.5 billion remaining under its buyback authorization. He wrote Thursday evening: "We expect the stock to rise modestly after the strong quarterly results." That call held only until 5:54 a.m. Friday. Cycle turning point, or a breather? There are two NAND prices: spot prices are transaction prices in the immediate market and react quickly; contract prices are periodically renegotiated between manufacturers and major customers and adjust with a lag. The above analysis noted as early as June 25, the day the memory trade peaked, that spot prices had stopped rising since March. Contract prices then rose for another two quarters, and the time gap between the two is now narrowing. Supply is still increasing. Kioxia plans to invest more than JPY5 trillion with SanDisk in Japan over the next six years to expand capacity, part of which will come from an ADR offering in the U.S. next year that could raise at least US$10 billion. Micron is building a US$24 billion NAND plant in Singapore; YMTC has captured 13% of the global NAND market, on par with SanDisk; and DRAM leader CXMT also entered the flash market in September. Samsung's NAND business also underperformed expectations. Giuni Lee of Goldman Sachs Group, Inc. said its NAND profit was "slightly below our expectations (both bit shipments and average selling prices were slightly lower)." Memory price increases have passed through to PCs, phones and servers. Rich Privorotsky of Goldman Sachs Group, Inc. noted that Intel Corporation's PC business is shrinking because "memory inflation is pushing up hardware costs." Slowing NAND price increases is good news for CPI and PC makers, but bad news for memory stocks that have been priced on the logic of ever-rising prices. Bears argue that memory is inherently a cyclical industry, yet over the past year it convinced itself it was structural. Spot prices peaked in March, contract price increases slowed from 70% to about 25%, and Kioxia is guiding for flat profit while investing JPY5 trillion in capacity expansion, and cutting shipments because its biggest buyers can't afford chips. According to Bloomberg, big tech's US$750 billion in AI spending is colliding with slowing growth in core businesses. Many investors believe the hyperscalers that were supposed to absorb this new capacity may also start driving a harder bargain. Bulls argue: a quarterly increase of about 25% is still a rare strong market, data center demand is structural, and Kioxia management may be deliberately conservative. This article is translated from "Wallstreetcn," author: Gao Zhimou, GMTEight editor: Zheng Yuyang