The semiconductor sector is experiencing a collective sell-off, yet industry profits are projected to triple by 2027. On Thursday, shares of SanDisk Corp. (NASDAQ: SNDK) fell sharply for a second consecutive day. What is driving this decline?
Taiwan Semiconductor Manufacturing (NYSE: TSM) reported second-quarter earnings that surpassed analyst expectations, with net profit surging 77% year-over-year. However, the report also cautioned that capital expenditure for the year would exceed $60 billion, a figure well above the prior market expectation of approximately $54 billion. Following this news, shares of the NAND flash memory chip maker, SanDisk, plunged 9.6% by 11:15 AM Eastern Time.
Why Positive News for TSM Weighed on SanDisk
Despite the strong earnings report, Taiwan Semiconductor Manufacturing shares were also sold off today, falling 2.2%. Investors are concerned that the massive expansion investment will significantly consume free cash flow.
However, the chips currently being manufactured by TSM are primarily central processing units and graphics processing units for AI clients. The operation of these chips requires pairing with NAND flash memory chips produced by SanDisk Corp..
In other words, TSM's increased capital investment and expanded chip manufacturing capacity should theoretically drive demand for SanDisk's memory chips, thereby boosting SanDisk's profitability.
Outlook for SanDisk's Fundamentals
From a long-term perspective, TSM's significant expansion of AI chip production capacity is not negative for SanDisk. It confirms the view that demand for semiconductor chips in the AI sector remains robust, supporting the simultaneous growth in demand for memory chips, which will lead to higher profits for SanDisk.
Of course, SanDisk's profits cannot expand indefinitely. Industry competition continues to intensify, and TSM's large-scale expansion is a microcosm of the collective capacity increases across the industry, including SanDisk's competitors. In the long run, supply will eventually catch up with demand, and the cyclical pattern of declining chip prices and narrowing industry profit margins will re-emerge.
However, this supply-demand reversal has not yet arrived. At least for now, SanDisk's profitability has underlying support.