Could Buying $10,000 of Sandisk Make You a Millionaire?

Sandisk (NASDAQ: SNDK) has been on one heck of a run since its spinoff from Western Digital (NASDAQ: WDC) last year. The flash-memory maker's stock has climbed nearly 2,000% since its market debut, including a 200% gain year to date.

That phenomenal growth has been fueled by growing demand from hyperscale cloud providers buying up more of Sandisk's products. Meanwhile, an industrywide supply shortage for NAND chips, the key components in Sandisk's products, has sent prices soaring. With both factors set to continue through next year, many investors still see plenty of upside left in the stock. But could buying just $10,000 of Sandisk stock today eventually make you a millionaire?

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Two major supply shortages are sending Sandisk through the roof

Sandisk has been affected by two major supply shortages over the past year or so.

First, hard disk drive makers Seagate Technology (NASDAQ: STX) and Western Digital have seen demand outstrip their supply. Hard drives are the primary form of long-term data storage in data centers. They play an important role in AI training, which uses tons of data. But the graphics processing units and central processing units processing that data only need a small portion of it at a time. Most of it is stored in "nearline" storage, which is accessible when needed but takes some time to access (think seconds rather than milliseconds).

Hard drives are a more cost-effective form of storage than Sandisk's more expensive solid-state drives (SSDs). But with both Western Digital and Seagate facing tight supply relative to demand, hyperscalers have started shifting more data storage to SSDs, especially in contexts where speed and performance matter more than price per terabyte of storage. That's dramatically increased demand for Sandisk's drives.

The other major supply shortage is in the memory chip market. Demand for high-bandwidth memory, which uses DDR memory, has pushed competing NAND chipmakers to focus their business on DDR chips instead of NAND. That's left Sandisk, which focuses exclusively on NAND chips, to take a growing piece of the market. It also means the NAND supply is stagnant for the time being, as only Sandisk is meaningfully working to increase capacity.

As a result of growing demand and slow supply growth, prices for NAND chips have skyrocketed. Sandisk said that the average selling price per gigabyte of storage it sold increased by a mid-30% range last quarter, while bit shipments increased by a low single-digit percentage. The result was 61% revenue growth and a massive gross margin expansion to 51.1%.

It's no wonder the stock has been soaring higher. The financial results back it up. But investors expecting Sandisk to increase 100-fold, turning a $10,000 investment into $1 million, may want to temper their excitement.

Can Sandisk keep growing?

Sandisk's core product, the NAND flash chip, isn't a highly differentiated product. Its current pricing power doesn't come from any sort of economic moat; it comes from the two forces described above converging at the exact right time for the company. But when hard drive and high-bandwidth memory supplies swing back into equilibrium with demand, so too will Sandisk's supply. As a result, its massive earnings power will be short-lived.

That's why investors shouldn't be willing to pay a premium for Sandisk's earnings, despite its considerable growth outlook for the next two years. Investors need to consider the long-term potential of Sandisk and the NAND market.

Overall, there are reasons to be bullish on Sandisk. For one, flash memory is used instead of hard drives in almost all consumer devices today. What's more, SSDs could gain usage in data centers if Sandisk and others can improve the technology to the point where the lifetime cost of ownership is closer to that of hard drives. It doesn't have to match hard drive costs, as SSDs offer other benefits, such as compactness, longer lifespans, and greater energy efficiency. Considering the growing demand for storage among both consumers and data centers, the long-term trend in bit shipments should favor Sandisk.

However, the pricing is bound to be volatile as it moves through demand cycles, and earnings could drop off a cliff when a glut of supply meets stagnating demand. At 19 times forward earnings, investors are suggesting that the current cycle could last several more years. However, management commentary from Sandisk, as well as other memory chipmakers and the hard drive makers, suggests that the supply shortage will only last until 2028. It's one thing to pay 19 times earnings for 2026, but earnings could be far lower in 2028 or 2029, which would make the stock fairly expensive at today's price.

Sandisk is already a $100 billion company after its phenomenal run over the past year. Increasing 100-fold would make it a $10 trillion company. That's more than twice as valuable as any other company in the market today. So, the odds aren't very good that Sandisk can grow 100-fold or even 10-fold from here. Investors should expect much more modest results from the company going forward.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Western Digital. The Motley Fool has a disclosure policy.