SanDisk (NASDAQ:SNDK) shares moved higher after Bank of America initiated coverage on the developer and manufacturer of data storage devices based on NAND flash technology with a ‘Buy’ rating and price objective of $61, representing upside of about 38% at the time of writing.
The analysts explained that their ‘Buy’ thesis is supported by several key factors, including improving memory pricing as the supply-demand balance shifts positively and room for profit margins to expand due to both the pricing trajectory and operating leverage.
Further, SanDisk's mix of end markets supports stronger through-cycle economics compared to peers, its joint venture structure creates a uniquely efficient shared capital expenditure model, and the company's valuation remains attractive relative to competitors, the analysts believe.
Bank of America sees NAND supply dynamics turning a corner after recent curtailments.
“Given the near-term supply-demand balance (1Q saw supply curtailment), the pricing environment for NAND is increasingly positive over the next few quarters,” the analysts wrote.
They added that while the industry remains fragmented with more than six players, there is potential for longer-term consolidation and structural pricing improvement.
Still, the analysts cautioned that longer-term industry returns will hinge on supply discipline. “With aspirations to drive better pricing in a capex heavy, historically low returns industry, SanDisk plans to pave a path for more disciplined pricing,” they wrote.
“Longer term, if pricing trends improve structurally for the industry, there could be much higher valuation re-rating potential but we are wary of normalization of such trends especially given pricing competition in China.”
SanDisk’s joint venture with Kioxia remains a core differentiator, according to Bank of America.
“SanDisk’s joint venture with Kioxia allows the companies to share capex costs in an industry where such costs have surged as high as $30 billion in recent years,” they wrote.
Despite the positive outlook, Bank of America acknowledges several risks to its thesis. These include the cyclical nature of the NAND industry, macroeconomic headwinds, and increased competition from China.
Shares of SanDisk traded higher following the release of the analysts’ report, adding 4.2% at about $46.