Key Points
Sandisk (NASDAQ: SNDK) stock is bouncing back from yesterday’s meltdown on Wednesday — and color me unsurprised.
Shares of the flash memory maker closed down 7.3% yesterday amid concerns about a possible increase in DRAM production by semiconductor giant Samsung in Korea. Sandisk regained 4.3% this morning, however, through 10:30 a.m. ET, as investor worries eased.
What Korea means (or doesn’t mean) for Sandisk
Samsung reported strong Q2 earnings on Tuesday, but paired this report with promises to capture even more of the DRAM market by building new factories in South Korea. This initially concerned investors, who worried that Samsung might ruin a good thing — low supply driving high profits for memory companies — by solving the supply problem. But here’s the thing:
Samsung is building factories to manufacture and sell DRAM.
Sandisk doesn’t make DRAM.
Sandisk makes NAND flash memory.
What this means for Sandisk stock
To an extent, both DRAM and NAND support high-bandwidth memory functions performed by artificial intelligence computer chips, but they’re not interchangeable. Thus, Samsung’s increased DRAM production doesn’t directly threaten Sandisk’s NAND profits. For this reason I think investors’ reaction in immediately selling off Sandisk stock on Samsung’s news was an overreaction.
That said, I get why investors are jumpy. Sandisk stock has gained an incredible 3,300% over the past year, and that also smacks of overreaction to the global memory deficit — which will be solved in time, either by buyers using memory more efficiently, or by finding new sources of supply (i.e., China), or by manufacturers building more memory chips.
One way or another, Sandisk’s 70% operating profit margin won’t last forever, and when it falls, Sandisk’s earnings will decline, and its share price will look more expensive.
Selling Sandisk stock before that happens — not after — seems prudent to me.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
