Why Shares of Sandisk Fell This Week

Shares of Sandisk (NASDAQ: SNDK), a flash memory company, fell hard this week after Alphabet's Google unveiled a new compression algorithm that allows AI models to use far less memory than before.

That sparked fears among Sandisk investors, adding to broader macroeconomic concerns about a potential slowdown in the U.S. economy due to the war in Iran. As a result, Sandisk's stock was down 14.1% this week to Thursday, 4:11 p.m. ET.

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Investors fear slowing memory demand

Sandisk and other memory processor companies have enjoyed strong demand for their products as tech giants have increased spending on AI data center infrastructure. More spending is on the way too, with Meta, Microsoft, Amazon, and Alphabet spending a collective $650 billion on capital expenditures this year, mostly for AI.

But earlier this week, Google announced a new compression algorithm for large language models (LLMs) that reduces their memory requirement by more than 6X. Investors took that to mean that AI won't need as much memory in the near future, and sold off shares of many memory stocks, including Sandisk.

There's a debate over whether AI data centers will eventually use less memory because of these advances, or if AI models will simply work more efficiently, utilizing more memory to make them even more productive. Considering the technology was just announced, it's far too early for investors to assume Sandisk is in trouble, but investors panicked anyway.

Some investors were already growing pessimistic because of increasing indications that the war with Iran could have a significantly negative impact on the economy. Some economists recently increased the likelihood of a recession this year because of the war, and a separate report from the Organization for Economic Cooperation and Development this week said the conflict could push U.S. inflation to 4.2% in 2026, higher than the Federal Reserve's estimate of 2.7%.

A wait-and-see approach is best right now

While it's understandable that Sandisk investors would be concerned about the recent Google technology, it's too early to know for sure how it will impact Sandisk. Some investors appear to be eager to call a collapse in AI data center investments and are jumping ship too early.

Sandisk shareholders would do better to hold onto the stock to see how the larger memory story plays out in the coming quarters.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.