After a Big Run, Here's the Honest Buy, Sell, or Hold on Sandisk

Key Points

Sandisk shares have risen 20-fold in less than a year.

The shockingly big rally has been largely fueled by a short-term situation that is inherently self-correcting.

While the driver of the big gain should cool off soon enough, it’s likely to stabilize at levels that are still very profitable for Sandisk.

• 10 stocks we like better than Sandisk ›

Sandisk (NASDAQ: SNDK) stock's 2,000% gain just since August of last year makes enough superficial sense. Sandisk is one of only a handful of companies that make computer memory chips, and the proliferation of artificial intelligence (AI) data centers is driving insatiable demand for computer memory. Stunningly, even with this huge run-up, Sandisk shares are still reasonably priced at just over 20 times this year's projected per-share earnings of $42.57. They're expected to more than double next year.

Nevertheless, it would be naïve to ignore the ever-changing rhetoric that's pushing and pulling on this and other AI-related stocks. This bullishness could fade just as quickly as it materialized, unwinding a sizable chunk of this rally.

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Even then, there's a decent value-based argument to be made.

Nothing to do with actual fundamentals

It's cliché to be sure, but Benjamin Graham is right nonetheless -- in the long run, the stock market may reflect companies' underlying fundamental values. But in the short run, it's a voting machine, reflecting investors' fear, greed, and feelings about a company... no matter how misguided those assumptions may be.

Ignore those short-term, ever-changing knee-jerk moves at your own peril, though, particularly for well-watched volatile stocks like Sandisk. They can be opportunities, or curses, affecting your long-term results.

There's the rub for anyone eyeing SNDK as a potential investment right now, or for that matter, any current shareholder mulling an exit while the stock's still near its recently reached record high. This high follows last year's spinoff from Western Digital (and subsequent relisting) early last year.

Not only are the company's fiscal results changing too quickly to make a meaningful value-based assessment of the stock right now, Sandisk is clearly caught up with the market's top artificial intelligence stocks. Most investors aren't quite sure how to price them anymore. Unfortunately -- out of necessity -- the scenario is forcing even the most diehard of fundamental-minded investors to become speculators.

There is clear long-term value here, though, if you can look far enough down the road. Even as the industry's current pricing power deflates in the foreseeable future once the supply/demand imbalance gets sorted out, there's still money to be made in this business in the short and long run. Analysts expect 2028's per-share profits to hold near 2027's estimate of $105.63, peeling back to a still-solid $91.85. The stock's currently valued at less than 10 times that long-range number right now.

A technical cool-off is in the cards, but...

Great. So, buy or hold the stock despite the recent rally?

Not necessarily. Plan on a pullback in the short run, in fact, which could evolve into an intermediate-term lull... especially if other artificial intelligence stocks do the same. That wouldn't be an indictment of the company's current and future results, or the stock's value. It's just the way the ebb and flow of trendy growth stocks works.

Once that cool-off is complete, however, don't be afraid to step in. Artificial intelligence isn't going away. Neither is its need for memory chips. Sandisk's current pricing power will fade, but that's seemingly already factored into the stock's price.

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James Brumley 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.