Transcription
Everyone's talking about a new memory supercycle related to AI data centers, and this is something that I feel like we've been talking about for a while now. You chip stock investors out there know all about this already. Welcome back. We're gonna talk about it more. Super exciting. Yeah, we think it's exciting. We're gonna be talking about SanDisk today.
The sponsor of today's video is fiscal ai. You can get 15% off any paid plan with the link in our video or in the description, fiscal ai slash csi. High level view here of SanDisk's quarterly revenue since their re IPO earlier this year. You can see that they're back in growth mode and it's possible that this market that SanDisk participates in is about to heat up. I wanna make cool charts like this one, visualize the businesses you invest in, check out fiscal.ai/csi.
If you saw the memory chip IDM presentation, and manual that we did early in the year, we talked about SanDisk a bit at that point. And we're gonna finally get around to doing a deep dive. SanDisk is cool again, or they're trying to be. We'll start with this first slide. Three main parts of a computing system. Logic, networking and storage. We'll focus on storage today where all of that data is stored, either waiting for processing or to be used later. And then here's basic memory types. Primary, which is short-term and access by logic. Secondary long-term, and not directly access by logic. So let's talk about this SanDisk product. NAND flash, which is primarily, long-term memory, thus storage. The storage part of the computing and it tends to be non-volatile. SanDisk technically is an integrated device manufacturer, IDM. And these memory IDMs are well quite large. When we did the update early this year, the estimates were memory chips were going to reach 185 billion in end market sales in 2025. Those estimates have been pushed, at least at the high end, closer towards 200 billion.
We've talked a lot about HBM, high bandwidth memory, a type of dram, short-term volatile memory that's co packaged next to GPUs. HBM three is sold out. It looks like all the HBM providers are gonna be sold out of HBM four as well. Here's what we're talking about when we're talking about HBM, Sk hynix, Samsung, Micron, and then a couple ancillary plays over in China, like CXMT. That's not what we're talking about today, though, nor are we talking about this part of the storage market. Western Digital, Seagate and Toshiba, all in the hard disc drive market. And we'll talk about Western Digital because Western Digital is where SanDisk was spun off from most recently. Yeah, they were owned by Western Digital for nearly a decade from 2016, and then SanDisk was an IPO, it was a spinoff IPO in February of this year. This is what we're going to be focusing on today, the NAND market, because that's the other big component. NAND flash for long-term storage or SSDs, solid state drives, and this is what that market looks like. SK hynix, Micron, Samsung, Yangtze, Kioxia and SanDisk.
We thought we'd illustrate a sample supply chain for you. Hopefully this kind of puts all the pieces together in, in your mind, because we've talked about a lot of these companies independently, uh, and some of the deals that are getting put in place, especially for data centers and new AI data center build out. Lam Research, historically a lot of their equipment gets sold to the memory chip makers. the companies and the slides we just showed you, including for NAND flash. And last year we did that update on the Moly, Molybdenum, process that Lam helped develop that, among other things goes into things like NAND Flash. So they sell to Kioxia and the other, wafer developers and then Kioxia and SanDisk have a partnership where actually most of SanDisk supply comes from Kioxia, but Kioxia also sells or can sell to other companies like Pure Storage, which buys NAND flash and develops them into SSDs, enterprise grade SSDs. Or there's that deal that we've been talking about where Kioxia is selling NAND flash memory directly to Meta in tandem with Pure storage, licensing software, and other technology to meta for some upcoming data center projects that will begin delivering, revenue for Pure storage in particular next year in calendar year 2026. So this is a sample supply chain Lam, the enabler, the manufacturing layer, Kioxia and SanDisk, and also, Pure Storage, which layers on the software and subscription. And then finally an end market purchaser, someone like Meta and its data centers.
Let's talk a little bit more about that partnership with Kioxia. Kioxia operates the NAND flash wafer fabs. In Japan. In Japan, Sandis and Kioxia both do design work and SanDisk is actually the minority owner of this Flash Ventures. You can see there at the top 49.9% of it owned by SanDisk 50.1. So the majority owned by Kioxia. And so I hear the questions coming right now. Why SanDisk, the maker of SSDs, basically a finished flash memory product that's ready to use. Why Sandisk and not Kioxia the company that actually handles the manufacturing? Well, here's one reason why. This is from SanDisk's, annual report that they just filed. SanDisk has actually worked out this pretty cool relationship with Kioxia via these joint ventures. So Kioxia has to handle all the operations of the fab itself, which as you know, is very expensive to do. And SanDisk just gets to buy the finished wafers at cost with a small markup. why would Kochia agree to that? Well, they have big competition, against the likes of Micron and Sk hynix and so on and so forth. So, they need someone to purchase their volume and they have some deals of their own in the works. Kioxia was also an IPO at the end of 2024, so both new companies, but basically 80% of the revenue comes from SanDisk for Kioxia. So our preference here of the two would definitely be SanDisk in this particular instance, because of this relationship, where SanDisk gets to buy the wafers at just a very small markup above cost and then gets to make these SSDs and sell them. Kioxia also, gets to make SSDs and sell them too. And just to note, but they do share costs for those fabs 50 50. So there is some risk there to SanDisk as well if, for instance, they end up making too many wafers. Yeah, that's true. And aren't purchasing it. yeah. good point. I didn't mean to say that SanDisk is a risk-free play on those wafer fabs.
We stuck this in here last week from Micron and here we are a week later, and suddenly there's kind of like this internet buzz about NAND flash all of a sudden and SSDs being a thing for data centers. Mm-hmm. It was HBM all year. That was the hot memory product. What's the impetus behind a data center company now suddenly saying, Hey, we want flash, we want SSD based long-term storage. what's the catalyst? Historically speaking, data centers use HDDs for their memory, for that storage component. But there's actually a shortage of hard disk drives and prices are rising because of this. We talked about this recently when we did our, analysis of Seagate. That was great news for Seagate. they can't even make as much as they have on order from these data centers or server companies. And so there's a big shortage of HDDs. There's also, of course, we've been talking about a shortage of high bandwidth memory, which is already very expensive. This was the impetus behind Nvidia also purchasing, Enfabrica or aqua hiring Enfabrica as well. When there's shortages of these commodity products, remember this is why it's a commodity. It's not a finished product on its own memory. CHIPS are not a finished product on its own. Uh, so if there's a shortage of it, a data center company is going to say, Hey, what else could we swap in? In this case, in this slide that we talked about a couple weeks ago, it's just DDR five, uh, DRAM chips in these systems. Or like in the previous slide you just showed you NAND flash instead of HDDs. So, it seems like NAND flash is maybe getting ready to have its moment. It's been kind of very, very slowly, gradually eating into HDD market share for many years. And now there's even more impetus than ever perhaps to gradually shift some of that HDD capacity over to gradually SSD solid state drives.
This is what we shared at the beginning of the year when we talked about SanDisk. This is a graphic of high capacity bandwidth optimized, HBF or high bandwidth flash, which they think might be an answer to HBM. Yeah, this is SanDisk's invention basically. instead of stacks of dram, stacks of flash to be able to, co-package next to GPUs, the bandwidth problem is going to be, tricky because NAND does not have the bandwidth of DRAM chips, volatile, dram. So that's one of the many challenges here. Of course, they also need to figure out how to 3D stack, HBF and then co-package it next to the GPUs. More views of what HBF is. You can see the dies of, of NAND flash getting stacked up and into a 3D cube, with that customized logic die, the logic controller at the bottom and then the whole thing packaged, co packaged on an interposer with a GPU, or it could also be a CPU or a, you see the TPU there, Google's Tensor processing unit, uh, and XPU from Broadcom or Marvell. So cool stuff being worked on. this alone is not a reason to go buy SanDisk stock right now, though. As cool as this looks and sounds. SanDisk and SK hynix are collaborating on this HBF. And so they expect that in the second half of 2026, they might have some samples. And then beyond that, hopefully actual functional product. Mm-hmm.
We'll start with the top of the supply chain, the enablers. Yeah. As Nick mentioned, we have Lam Research highlighted because Lam provides a lot of equipment to memory manufacturers. It's a choke point in the industry. And, Lam's gone up a lot in this last year. Mm-hmm. It's been pretty crazy. Yeah. it's done great, but it's not just Lam that sells to the memory chip makers, uh, including the N flash companies. We called out Applied Materials after the last earnings reports. They also sell to the memory chip makers. So does KLA, obviously A SML, involved in that process. All of them, so it's not just exclusive to Lam. if you missed Lam, there's other opportunities even just within these top five, wafer fab equipment providers and advanced packaging equipment companies.
Let's continue on the supply chain. We already talked a little bit about Kioxia versus SanDisk, why we prefer SanDisk. So let's talk about the financials of SanDisk and see if this one makes sense. They break it down into three end markets. Cloud, client, and consumer. Currently, client is their biggest revenue generator, and they had a 19% quarter over quarter increase. For cloud $213 million, 8% quarter over quarter increase. Consumer, 585 million, increased 2% quarter over quarter. We've been in a bit of a downturn obviously for a while. So SanDisk is just starting to return to growth. We've been talking about that with Pure Storage, as you mentioned. And of note here, the big chunk of revenue, majority of the revenue coming from client, that of course would correspond with if you follow Intel and A MD, they have those reporting segments as well, that's called client. That would be PC and laptop. And that kind of makes sense if you buy especially a higher end PC or laptop these days, maybe it comes with, half a terabyte or a full terabyte or more of SSD, solid state drive, long-term storage versus an old hard disk drive. This is SanDisk's primary market. Where they really, really would like to go, obviously is into more cloud, more data center, which is their smallest segment. That's maybe one bad thing, against SanDisk versus a company like Pure Storage, which can buy nand, flash chips from anybody that provides it. Stick a nice, software layer and subscription business on top of it and continue to grow at a minimum 10% rate, even in the midst of a, pretty nasty industry downturn the last few years.
I mean, besides the fact that, you know, they've been operating under Western Digital for the last decade, these numbers obviously need to improve, right? GAAP net loss in blue, free cash flow is in orange. Both are negative. However, in the last reported 12 months, you can see free cash flow was nearing break even. And we would actually expect this to continue in fiscal year 2026, the new annual period that just started for SanDisk. I think this is maybe another reason why SanDisk stock has rallied. We've got the mention of SSDs being used more frequently in data centers because of HDD shortages, and then also, the company's only been public for, nine months, eight months, and they're flipping from a free cashflow loss to free cashflow positive. That could be a big catalyst for the stock as well. If there's a couple years of growth cycle left, based on the, revenue slide, Kasey just, uh, just showed. You did say they share costs with Kioxia. This is another component of the free cash flow and future margin potential, right? Yeah, exactly.
This slide shows their capital expenditures and most of that capital expenditure is going towards this partnership, with Kioxia for Flash Ventures. which is really cute by the way. So that they have this asset light, so to speak, business, but really they're pouring quite a bit of funding into this joint venture to keep their 50% , held up with Kioxia. In this most recent year, 686 million, for capital expenditures. Guidance, for Q1, fiscal 2026. The revenue GAAP on the left adjusted metrics on the right, that revenue, the low end of that guidance actually represents 10.5% sequential growth forecasted over the previous quarter, the quarter just reported. That's actually pretty solid growth. It looks like the rapid re expansion that Micron and SK hynix have been enjoying is finally coming for the NAND flash market. So this is interesting to see. Um, and on an adjusted basis, SanDisk is actually forecasting robust profitability to kick off their new fiscal year. Uh, so good stuff here on this slide. Uh, another, like I said, catalyst for the stock, probably that flip from operating at a loss to operating at a profit.
And then the balance sheet. Unfortunately, they got saddled with a little bit of debt . They have a loan, in relation to that separation from Western Digital. Yeah, thanks Western Digital. Thanks a lot guys. So Western Digital has less debt now. Yeah. So there's that. There's that. Um, but yeah, not the worst looking, balance sheet. 1.49 billion in cash and cash equivalents and 1.8 billion in debt. Which they paid down a little bit in their first full quarter as a publicly traded, company. So maybe that's another one of their priorities that will continue, during this upcycle for NAND flash. and then paired with that guidance, that we showed you a couple slides ago, take a look at the next 12 months, kind of right there in the middle of the screen valuation, NTM next 12 months based on early estimates for fiscal year 2026, maybe this is a cheap stock even after the stock going up 200% more or less in the last, couple months alone. It's still trading for about 30 x expected free cash flow. an expectation that adjusted earnings per share flip robustly positive as well.
And I guess maybe to go back to the supply chain discussion, if you're looking for a well-rounded investment in the memory market, in the hopes that that's like the next coming wave for data centers, which, we've been talking about this for two years now. That's why we bought Pure Storage in the first place. It looks like it's coming, finally. maybe SanDisk becomes part of a basket play alongside Lam Research and the other Fab Five, Pure Storage, obviously, we already did the update on them, check that review for a bit more detail on what we expect from them. And then a company like Meta and the other Hyperscalers, which Pure Storage had said more of those hyperscalers are now getting interested in their own SSD based long-term storage project, as well as they continue to update their data centers for the AI era. SanDisk Kasey says it's cool again. Thanks everybody for watching today's video. Make sure you hit the subscribe button, hit the like button and check us out over on our website, chip stock investor.com, where you can sign up for Semiconductor Insider. Do it. You totally want to do it. It is the investment service. You didn't know that you need it. Check it out.