Sandisk (NASDAQ: SNDK) has been one of the most important stories of the artificial intelligence (AI) revolution. The memory maker has seen skyrocketing demand for its NAND flash memory products, which are critical for AI development, and high growth has led to outstanding stock gains; Sandisk stock is up 444% over the past year as of Nov. 4.

However, that’s down from much higher gains earlier this year. In fact, despite phenomenal results, Sandisk stock is down 47% since the beginning of July. Is this an opportunity to buy on the dip? Or should investors steer clear?

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It’s all about the NAND

Sandisk makes memory products, from the memory cards you keep in your phone to the chip components that allow AI models to run training and inference. It has three segments: consumer, edge computing (including devices like computers and smartphones), and data centers. The data center segment has driven the company’s incredible growth over the past few quarters, resulting in tremendous profitability.

In its fiscal 2027 first quarter, Sandisk beat Wall Street’s expectations. Sales rose 378% year over year to $11.0 billion, and earnings per share (EPS) hit $52.60 (before the stock split), up from $0.75 a year ago.

Sandisk also announced an eight-for-one stock split, with split-adjusted trading beginning Nov. 20. The split lowers the share price without changing the company’s value.

Note the astronomical change in EPS, and know that Sandisk won’t be able to keep up that kind of growth going forward. Memory typically moves in a cycle, and it looks like it’s at a peak right now. It might be able to sustain peak levels for some time, but the market is worried it won’t sustain that kind of growth.

Management is keenly aware of this and has introduced a new arrangement with clients that it calls the new business model (NBM) deals. It already has eight of these NBMs, with multi-year agreements to lock in revenue.

Sandisk is a cheap stock

Sandisk probably can’t keep growing at this pace, but demand for its memory products should hold up. AI is still getting started, and NAND will remain a major component.

So why is the stock down so much? The market seems to be treating these earnings as peak-cycle profits that won’t last. Sandisk stock trades at a dirt cheap 9 times trailing 12-month earnings and only 10 times free cash flow, but 6 times sales.

That’s the value-trap risk: a low multiple on peak earnings can look cheap right up until earnings fall. The bargain case is that analysts still expect profits to rise, which puts the forward P/E in the low single digits.

That still looks oversold to me. Sandisk stock is not for the risk-averse investor, but at this price, it could be worth a small position for investors who can stomach volatility.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Sandisk Stock Is Down 45% Over the Past Four Months. Is It a Bargain or a Value Trap? was originally published by The Motley Fool