Morgan Stanley Removes Sandisk 'Top Pick' Status Despite Bullish Outlook on AI-Driven NAND Super Cycle

Key facts

• Morgan Stanley removed Sandisk from its 'Top Pick' list while maintaining a bullish rating.
• The bank forecasts 2026 EPS of $16.35 in a base case and a potential peak cycle EPS of $30.
• Enterprise SSD bit growth is projected at 40-50% year-over-year in 2026, with incremental demand exceeding 120 exabytes.
• Sandisk's enterprise SSD exposure is low at 12% of bit shipments in Q2, lagging peers.
• NAND supply growth in 2026 is expected to be constrained, with only Sandisk's JV with Kioxia adding new wafer capacity.
• Sandisk shares rose over 7% on Monday following strong earnings and price target upgrades.
• DRAM investment remains prioritized by Samsung, SK Hynix, and Micron due to HBM demand and higher margins.
• a 30% sequential decline in NAND system revenue in Q3, with recovery expected in H2 2026.

A Contrarian Call on a Controversial Stock

Morgan Stanley has removed Sandisk (NASDAQ:SNDK) from its 'Top Pick' list, even as it reaffirms a bullish stance on the semiconductor memory maker. In a detailed report, the bank dissected the controversy surrounding Sandisk, examining demand, supply, and valuation. The conclusion: the stock remains attractive after its sharp rally, but earnings growth needs time to align with the current share price. The move comes amid a broader debate over whether the NAND industry is entering a 'super cycle' driven by artificial intelligence. While many investors have embraced the narrative, skepticism persists. Morgan Stanley's analysis seeks to bridge the gap, offering a nuanced view that acknowledges both the opportunities and the risks.

AI and Data Center Demand Set to Reshape NAND Landscape

The bank projects that 2026 will mark a turning point for AI and data center contributions to NAND industry growth. Enterprise SSD bit growth is expected to reach 40-50% year-over-year, with incremental demand from hyperscalers alone exceeding 120 exabytes. This surge is underpinned by massive capital expenditure from cloud giants and signals from Apple, which have already driven a rally in memory stocks: Micron rose 9%, Sandisk 7%, Western Digital 4%, and Seagate 2% in a single session. However, Sandisk's exposure to this high-growth segment remains limited. In the second quarter, enterprise SSDs accounted for only 12% of its bit shipments, a share that has been stable excluding China's YMTC. Because enterprise SSDs command higher prices, Sandisk's average selling price and revenue growth may lag behind peers during years when this segment drives the market.

Supply Constraints and the Kioxia Joint Venture

Morgan Stanley sees constrained NAND supply in 2026 as a key support for pricing. The only potential source of new wafer capacity is Sandisk's joint venture with Kioxia, which is ramping up its K2 fab. Equipment suppliers confirm limited investment in the first half of 2026, with spending recovery concentrated in the second half, meaning supply additions will likely impact 2027 at the earliest. Lam Research, a core NAND equipment vendor, reported a 30% sequential decline in NAND system revenue in the third quarter. While a gradual recovery is expected, a significant acceleration is unlikely until the second half of next year, consistent with commentary from Richardson Electronics, VAT, and other OEMs.

DRAM Investment Priority Squeezes NAND Capacity

Despite improving NAND pricing, DRAM remains the priority for major players SK Hynix, Micron, and Samsung. Driven by high-bandwidth memory (HBM) demand, DRAM margins are significantly higher, and HBM's additional wafer demand continues to divert capital expenditure toward high-return DRAM. This dynamic limits NAND capacity expansion, reinforcing Morgan Stanley's positive pricing outlook for 2026. NAND bit growth has fallen below pre-2022 levels, and the industry's capital spending is skewed toward DRAM. This structural imbalance could support pricing even as demand grows.

Base Case and Upside Scenarios for Earnings

In Morgan Stanley's base case, Sandisk achieves 15% bit growth in 2026, driven by BiCS8 node ramp, with unit bit costs declining 12% year-over-year (8% excluding underutilization and ramp costs). Pricing is expected to rise 14.4% (flat in H2), yielding a 45.7% gross margin and EPS of $16.35. In an optimistic scenario, bit growth approaches 25%, unit costs fall 8% (as high-cost enterprise bits mix in), and pricing rises 31% with sequential increases each quarter. Interest expense halves from the current $47 million per quarter. This results in $13.1 billion revenue, 50.3% gross margin, and non-GAAP EPS of $26.26. If gross margins reach the mid-50% range, EPS could exceed $30.

The Path to a True Super Cycle: Structural Replacement of Hard Drives

For the NAND super cycle to mirror DRAM's AI-driven expansion, enterprise SSDs must become a structural replacement for hard disk drives. Morgan Stanley believes 2026's acceleration could be one to two years above trend in this long-term growth area. Sandisk needs to significantly penetrate this market to convince investors that earnings can sustainably exceed historical levels. Unlike DRAM, NAND remains heavily dependent on smartphones and PCs. Without a structural shift, the cycle will require more participation from those end markets to extend profitability. The bank's analysis leaves the door open: if enterprise SSD adoption accelerates, Sandisk's BiCS8 ramp and flexible capacity from the K2 fab could enable it to catch up.

Short Sellers Retreat as Sandisk Earnings Bolster Sector Confidence

The positive sentiment around Sandisk has also impacted the broader semiconductor market. Short interest in the iShares Semiconductor ETF and the Direxion Daily Semiconductor Bull 3X Shares ETF has declined, as Sandisk's record financial performance boosted confidence across the industry. The stock rose over 7% on Monday following a series of strong earnings reports and aggressive price target upgrades from analysts. Yet the controversy remains. Morgan Stanley's decision to remove the 'Top Pick' label underscores the tension between near-term valuation and long-term potential. For Sandisk to fully realize the super cycle, it must not only ride the AI wave but also overcome its legacy of underinvestment in enterprise SSDs and navigate a supply landscape shaped by DRAM's dominance.

The bottom line

• Morgan Stanley removed Sandisk from 'Top Pick' but maintains a bullish rating, citing the need for earnings to catch up to the stock price.
• Enterprise SSD demand from AI and data centers is projected to drive 40-50% bit growth in 2026, with incremental demand exceeding 120 exabytes.
• Sandisk's low enterprise SSD exposure (12% of bits) may cause it to lag peers in revenue growth during this segment's expansion.
• NAND supply growth in 2026 is constrained, with only the Sandisk-Kioxia JV adding new capacity, supporting pricing.
• DRAM investment remains prioritized by major players, limiting NAND capacity expansion and reinforcing the pricing outlook.
• Short sellers in semiconductor ETFs have retreated following Sandisk's strong earnings, signaling increased sector confidence.