The market is growing numb to the string of historic earnings reports we’ve seen from the memory industry. SanDisk delivered one of the best single-quarter earnings reports in NAND history with revenue nearly doubling sequentially, data center inflecting 233% QoQ and gross margin expanding 27.5 points – all of that in three, brief months.
Total revenue of $5.95B beat estimates for $4.73B with data center revenue up 233% QoQ to $1.47B. Edge revenue of $3.66B also inflected 118% QoQ. The bottom line was exceptional with GAAP EPS of $23.03 and adjusted EPS of $23.41; beating estimates for $14.66 … (crazy!) Today, data center represents 25% of SanDisk’s revenue compared to 15% last quarter.
Looking forward, revenue guidance indicates growth of 34.5% QoQ and 321% YoY for revenue of $7.75-$8.25B, beating estimates for $6.63 billion. In similar fashion, the adjusted EPS beat on next quarter’s guide is also substantial at $30-$33 versus estimates of $23.44.
On the earnings call, the more important development is the introduction of New Business Models (NBMs) which are essentially long-term agreements. Management mentioned they have signed five NBM agreements, three in FQ3 and two more in FQ4. This is an adjustment to the market which has been fickle in how it perceives memory stocks. On one hand, the surge in pricing has allowed strong inflections like what we’ve seen today – yet, this led the market spiraling into fears around the cyclicality of pricing and the risk that memory companies build too much supply. Now, as LTAs are being introduced to smooth out some of the lumpiness that has historically defined the memory industry, and to provide commitments that can support future capacity expansion, the market is starting to swing to the opposite concern: that these agreements could cap upside if pricing remains strong.
Extremely Dynamic Market
Before getting into the nitty-gritty of memory jargon, the most important takeaway from arguably Wall Street's highest-growth AI winner today came from two moments in the call.
Management stated on the FQ4 guide: "It's early in the quarter, and it's an extremely dynamic market. So it pays to be a bit conservative when you're going down that path."
The takeaway is that management may be sandbagging due to unknowns in pricing momentum, rather than as a tactic; it’s truly due to unusual levels of uncertainty. This was in response to a question as to why the EPS guide implies a pricing deceleration, the answer is that pricing accelerated faster than we expected in FQ3, and we'd rather guide conservatively than lock in expectations we can't beat.
There was an additional commentary about the surging demand backdrop:
"Before what we saw this week, we would raise even our calendar year '26 data center growth number to the mid-70s from where we were in the 60s just 3 months ago, which is up from the 40s 3 months before that and the 20s 3 months before that. So we continue to see very, very strong growth in the data center."
That's a roughly 4x increase in management's CY26 data center growth forecast over nine months, across three-month increments, with each revision higher than the last. Against a NAND bit supply base growing in the high teens through nodal transitions, the demand-supply gap is widening every quarter rather than closing. Perhaps not at the pace we saw this past quarter, but likely to continue seeing material growth.
KV Cache will Drive more TLC and QLC Demand
As it stands, SanDisk’s revenue is 2/3 triple-level cell (TLC) and 1/3 quad-level cell (QLC). TLC is driving the bulk of the revenue as enterprise SSDs are dominating with 8TB and 16TB PCIe Gen 5 products for speed and latency. QLC is expected to grow as it’s more of the storage-focused enterprise SSD product at 128TB and scaling to 512TB.
Right now, KV cache requirements are driving more TLC demand with management stating: "Given the inference architectures and some of the comments earlier around KV cache and how important it is and quite frankly, how it can scale dramatically based on your assumptions of the use case you're serving. There's a very, very strong demand on TLC."
However, QLC will increase in importance over time as it stores more bits in the same cell, it’s cheaper per bit and higher density, and has become a desirable capacity layer for the KV cache.
As a reminder, we’ve covered the importance of KV cache for inference workloads stating “The decode phase generates the output tokens one by one in a sequential manner, relying on the KV cache and previous tokens, making it extremely reliant on memory bandwidth and capacity to rapidly access cached tokens. When discussing how AI workloads are memory constrained, it comes from the decode phase.”
QLC is shifting from cheap bulk storage to a key component for long-context reasoning. As inference deployments scale, the capacity tier, where QLC's density advantage is strongest, should grow as a share of overall enterprise SSD demand.
To meet this demand, SanDisk is releasing “Stargate” UltraQLC SKUs that will enter volume shipments in June at the 128TB size and with 256TB following shortly after: “Looking ahead to the fiscal fourth quarter, we expect to begin shipping our QLC Stargate solutions for revenue, adding another layer of revenue growth.”
Here is what was stated on the call regarding why QLC will see a higher product mix:
“Stargate is, and the progress we've seen so far in the portfolio is coming off of that compute focused TLC drive. And now we're going to bring the whole QLC product to market, which has been under qualification with some major players for well over a year."
These are not competition with each other, rather I am pointing out stronger QLC growth may layer on top of TLC growth during the KV cache architectural shift. Here is another clue that QLC may contribute to a step-up in volume soon: “"Our BiCS shipments were flat year-over-year and down high teens sequentially as we build higher inventory levels, primarily to support strong BiCS8 QLC demand in the fourth quarter Stargate ramp and to prepare for our recently signed new business models."
When asked how the KV cache opportunity has changed recently (given the new architecture emphasis was announced in January at CES), the response was lengthy with this as the most important excerpt: “And I think this just reinforces this business model question as our customers go through those calculations and understand the significance of NAND that, that could drive that is a good foundation for the conversation about striking deals 2 years, 3 years, 5 years in length that are very, very substantial in the amount of demand. I mean we're talking about 5 deals and more than 1/3 of our portfolio. So it's an extremely, extremely dynamic situation.”
New Business Model Agreements (NBMs) Announced with 5 Signed and More on the Way
SanDisk has now signed five NBM agreements with three in FQ3 and two more in early FQ4 with active negotiations underway for additional contracts. Total remaining performance obligations (RPO) have reached $42 billion, representing over a year of locked-in demand at the FQ4 guide of $8B at the midpoint. According to the CFO on the earnings call, customers have committed $11B in guarantees backing the five agreements and this as structured as a pre-payment.
Here is what was stated on the call: “As you will see in our 10-Q, the 3 contracts signed during the quarter provide minimum contractual revenue of approximately $42 billion. We will update you as we make more progress. Each contract is secured with financial guarantees that protect us if the purchase obligations are not fully performed by our customers. In aggregate, the 5 agreements signed so far include financial guarantees that exceed $11 billion and include prepayments and other financial instruments, managed by third-party financial institutions. Out of these agreements, $0.4 billion in prepayments are included in our Q3 balance sheet. These 5 new business models account for over 1/3 of our BiCS in fiscal year 2027, which we expect to increase as we conclude additional agreements over the next few months.”
Management stated they are targeting 50% of the supply under NBM agreements compared to current levels of 1/3rd: “So I expect the number that we said at least 1/3. So we're over 1/3, and I expect that number to go up over the next several quarters. Where can it get to? I definitely think it can get above 50%. And — but we'll see.”
The market has been assuming that multi-year agreements cap price in the same manner that LTAs have constrained HDD pricing. Overall, the market tends to sell these announcements because the takeaway is that it limits the upside from pricing increases. However, it was stated in the call that NBM pricing is variable and not fixed.
In this case, volume is committed while pricing flexibility remains: “These agreements are tailored to meet the needs of our customers and in aggregate, provide us with demand certainty and financials that we expect will be consistent with our fiscal fourth quarter guidance. The duration of this agreement varies, with the longest contract extending to 5 years. In aggregate, volume commitments increased during the life of the contracts with quarterly commitments and a combination of fixed and variable pricing. This agreement with variable pricing allow us to capture upside if prices rise while allowing our customers some upside if prices decline over time.”
Durability of the Margins
When it comes to a stock reporting very strong growth, you can pretty much pick anywhere on the income statement for where the strength is being interpreted as topping. Revenue up 97% sequentially, gross margin expanding from 51% to 78% and operating margin expanding from 35% to 69%, EPS up 4X is why every line item becomes concern for the stock peaking. Although there are no guarantees, and a lot of this depends on a mix of spot pricing and the variable pricing in the NBMs, the following statements were made to suggest the margins could be somewhat sustainable (not going to fall off a cliff)
In the opening remarks, the CEO stated: “Our customers' commitments are backed by firm financial guarantees. These partnerships support durable structurally higher earnings and a significantly more predictable and less cyclical business for Sandisk.”
Later, the CFO confirmed something similar: “Together, these transformations have resulted in a step change in what we believe to be sustainable gross margins, free cash flow generation and earnings power in a market that we expect to grow in the double digits for the foreseeable future.”
When asked if the margins can sustain, the answer was vague but did hint the NBMs are not compromising on margins in exchange for certainty: “And I think that now we're getting a more even distribution of those — of that value. So we're not necessarily interested in trading away that value for certainty. We're interested in getting that value and getting certainty as well.”
Financials
By Royston Roche
Revenue: Explosive Acceleration to 251% YoY
SanDisk delivered a blockbuster Q3 FY26 ending April, with revenue surging to $5.95 billion, representing 251% YoY growth and 96.7% QoQ growth. Revenue beat consensus estimates by a remarkable 25.7%, reflecting the severity of the structural NAND supply-demand imbalance that has taken hold through 2025 and into 2026. Revenue growth accelerated sharply from 61.2% YoY and 31.1% QoQ in the previous quarter.
Revenue has now accelerated sharply in each of the past four consecutive quarters. It is an extraordinary acceleration trajectory that underscores just how rapidly NAND pricing and data center demand have inflected. The unprecedented NAND pricing, supply tightness, and surging AI-driven enterprise SSD demand as the primary drivers of the outperformance.
Looking ahead, management guided FQ4 revenue of $7.75 billion to $8.25 billion, implying a YoY growth of 320.8% YoY and 34.5% QoQ at the midpoint and beating estimates by a solid 20.7%. Analysts expect FQ1 revenue to grow by 241.9% YoY to $7.89 billion and 183.4% YoY to $8.57 billion in FQ2.
Segment Performance: Data Center Leads with 645% YoY Growth
SanDisk's segment mix continued its rapid shift toward higher-margin, AI-driven end markets. Data Center revenue exploded to $1.47 billion in FQ3, up 645% YoY and 233% QoQ, reflecting hyperscaler demand and the ramp of AI-adjacent storage solutions. The segment reported sharp acceleration from 76% YoY and 64% QoQ growth in the previous quarter.
Edge revenue grew by 295% YoY and 118% QoQ to $3.66 billion. Consumer revenue was $820 million, while down (10%) QoQ, grew 44% YoY, with the QoQ decline attributable to seasonality.
Margins: Rapid Expansion Across All Lines
Margin expansion in FQ3 was exceptional at every level of the income statement, driven by pricing power, shift towards higher value mix, and operating leverage.
- Gross margin reached 78.4% in FQ3, a stellar expansion of 27.5 points QoQ, and 55.9 points YoY. Gross profit reached $4.66 billion in the quarter, up from $1.54 billion in FQ2 and $382 million in the same period last year. Looking ahead, management guided FQ4 gross margin of 79.9%, which would represent a further 150 basis points of sequential improvement, signaling that pricing power remains firmly intact.
- Adjusted operating margin improved by 33.4 percentage points sequentially to 70.9% in FQ3 and up significantly from a mere 0.1% in the same period last year, reflecting strong operating leverage. Management guided adjusted operating margin to improve 300 basis points sequentially to 73.9% in FQ4.
- Adjusted net income was $3.68 billion or 61.8% of revenue compared to a loss of ($43 million) or (2.5%) of revenue in the same period last year.
Adj. EPS of $23.41, Beating Estimates by 59.7%
SanDisk reported adjusted EPS of $23.41 in FQ3, beating estimates by 59.7%, indicating that analyst models continue to structurally underestimate NAND pricing strength. GAAP EPS came in at $23.03, beating estimates by 62.4%.
Looking forward, management guided FQ4 adj. EPS to $30–$33, implying a midpoint of $31.50 and beating estimates by 34.4%. The company has witnessed strong EPS revisions recently and the magnitude of these revisions reflects a complete repricing of SanDisk's earnings power by the sell-side, consistent with the company's supply-constrained, pricing-dominant operating environment.
Cash Flow & Balance Sheet
The company’s cash flows have improved significantly primarily due to higher profits.
- FQ3 operating cash flow was $3.04 billion or 51.1% of revenue compared to a mere $26 million or 1.5% of revenue in the same period last year.
- Adjusted free cash flow was $2.96 billion or 49.7% of revenue compared to $220 million or 13% of revenue in the same period last year.
- Notably, SanDisk has zero debt and $3.74 billion in cash. The company repaid the outstanding $603 million debt in the recent quarter, funded by the strong cash flows.
- The Board authorized a $6 billion share buyback program, effective immediately with no expiration, signaling management's confidence in the durability of cash flows.
- Inventory increased by 13.7% QoQ to $2.24 billion.
Conclusion:
As stated, there has been roughly a 4x increase in management's CY26 data center growth forecast over nine months, across three-month increments, with each revision higher than the last. Against a NAND bit supply base growing in the high teens, the demand-supply gap is widening every quarter rather than closing. Perhaps the pace will slow from what we saw this past quarter, but even still, it’s likely NAND will continue seeing material growth.
We want to be sensitive to the fact that growth stocks can peak – and this happens to be our specialization. Growth stocks typically peak when the demand signals weaken rather than when companies sign more multi-year commitments. That said, we also respect pre-set price targets. Precisely because this is our arena, we may risk-manage the profits.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in SNDK at the time of writing and may own stocks pictured in the charts.
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