Why Sandisk Stock Dropped Today
Key Points
Worries that OpenAI may slow the pace of AI development dragged Sandisk lower on Monday.
Sandisk boasts a fortress balance sheet and strong free cash flow.
Even if Sandisk grows only half as fast as Wall Street expects it to, the stock still looks buyable.
- 10 stocks we like better than Sandisk ›
Sandisk (NASDAQ: SNDK) stock fell 3.9% through 2:45 p.m. ET Monday after OpenAI announced over the weekend that it will pause training on some of its artificial intelligence models as it investigates new reports of AI agents going "rogue."
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Why this might be bad news for Sandisk stock
Training AI models -- and even more using AI to answer questions (inference) and operate AI agents -- requires enormous amounts of memory. All year long, this rise in demand for computer memory has been pushing prices higher for the NAND memory chips that Sandisk produces, boosting sales, profit margins, and bottom-line profits, too.
A chorus of calls lately to slow the pace of AI advancement, however, has investors wondering how long the big profits can last. Additionally, a recent rise in U.S. interest rates -- and warnings that persistently high inflation may require further rate increases -- is putting pressure on tech stocks in general.
Should you worry about Sandisk stock?
This is where investors can draw some comfort from buying with a margin of safety.
On the one hand, higher interest rates will be bad news for companies that need to borrow money and pay that interest -- but Sandisk doesn't. Sandisk boasts $4.5 billion more cash than debt on its balance sheet, and 100% of the company's reported $11.4 billion in trailing net income is fully backed up by real free cash flow.
So Sandisk simply doesn't need to borrow.
As for worries about growth, at 22.3x trailing earnings, Sandisk is a huge bargain if analyst forecasts for 40% long-term annual earnings growth prove correct. And even if the analysts are wrong and Sandisk grows just half that much -- say, 20% per year -- that's nearly enough to justify the stock's current price.
Sandisk stock looks like a safe bet 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.
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