For a long time, the memory storage sector has been viewed as one of the most cyclical segments within the semiconductor industry, but Bernstein suggests this perception may be undergoing a fundamental shift.
In a research report published on June 30th, Bernstein significantly raised the price target for SanDisk Corp. from $1,700 to $3,000. This upward revision is not based on more aggressive near-term price forecasts, but rather on a deeper assessment: a new generation of Long-Term Agreements (LTAs) is reshaping the business model of the memory industry, leading to a significant reduction in profit volatility and thereby driving a re-rating of valuation frameworks.
The report argues that the market has historically assigned low valuations to memory companies because the industry was highly dependent on spot prices. Once prices entered a downturn, revenue, profits, and even cash flow would deteriorate rapidly. However, the new type of long-term agreements being implemented by companies like SanDisk Corp. and Micron are fundamentally different from historical LTAs. In essence, they function more as a commercial contract that locks in future profitability, rather than a traditional supply agreement.
Key Evolution in the New LTAs: Beyond Just Securing Supply
Bernstein notes that investors' past skepticism towards long-term agreements in the memory industry was not without reason.
Traditional LTAs were almost entirely skewed in favor of the customer: the customer held purchasing options, while the supplier bore the supply obligation. When market prices fell, customers could abandon their purchases, leaving suppliers with almost no protection. Therefore, these agreements did little to truly smooth out the industry cycle.
The new model features three fundamental changes. First, pricing is no longer completely tied to spot market fluctuations, instead using fixed prices or price bands with ceilings and floors. Second, customers are required to provide substantial upfront financial commitments or guarantees, significantly raising the cost of default. Third, contract durations have extended from one or two years historically to 3-5 years, with some agreements even reaching five years.
The report suggests this marks the first time LTAs have become genuinely "mutually binding" contracts, where suppliers no longer unilaterally bear cyclical risk.
More importantly, the market generally underestimates the protective role of the financial guarantee mechanism. Many investors simplistically view the over $11 billion commitment for SanDisk Corp. and $22 billion for Micron as a fixed percentage of the total contract value. However, Bernstein points out that as contracts are fulfilled, the remaining contract value continuously decreases while the guarantee amount remains constant. Consequently, the guarantee coverage ratio increases over time.
In other words, the closer to the end of the contract, the higher the economic cost for a customer to default, and the stronger the price protection for the supplier.
Profits Remain Significantly Higher Than in Traditional Cycles Even with a 70% Price Crash
To test whether this business model genuinely dampens cyclicality, Bernstein constructed a stress-test model.
The model tested the impact on profitability under various scenarios: different LTA coverage ratios, different price decline magnitudes, and different stages of contract execution. It assumed a worst-case scenario where customers would abandon the contract and turn to the spot market for purchases if the market price was even $1 lower than the contract price.
Even under this extreme assumption, the results still showed that long-term agreements significantly reduced the downside risk to profits.
Bernstein estimates that with 60% of SanDisk Corp.'s shipments covered by LTAs, even if NAND prices crash 72% from their peak to $0.11/GB—a decline exceeding those seen in several past industry downturns—the company's Fiscal Year 2030 EPS could still reach $214. Without LTA protection, EPS under the same scenario would be only about $81.
Furthermore, the protective effect strengthens as contracts progress into their later stages.
The report projects that by FY30, as the remaining contract value decreases, the same scale of financial guarantee will cover a larger proportion of the remaining contractual obligations. In an extreme stress test where market ASPs fall to just $0.06/GB, with LTA coverage between 60% and 80%, SanDisk Corp.'s blended ASP could still be maintained between $0.19 and $0.24/GB, representing 65% to 85% of the contract floor price. Concurrently, gross margins could remain above 80%, far higher than levels seen in traditional memory cycles.
The Cycle Persists, but the Valuation Rationale is Shifting
Bernstein does not believe LTAs can completely eliminate the memory industry cycle.
The report notes that prices will still enter declining phases in the future, and company profits will be affected, but the magnitude of the decline will be significantly smaller than in historical cycles. Therefore, the market should no longer view SanDisk Corp. through the traditional valuation lens of a "commodity cyclical stock."
Regarding earnings forecasts, Bernstein raised its FY27 and FY28 EPS estimates for SanDisk Corp. to $243 and $272, respectively, representing increases of approximately 22% and 34% from prior forecasts. In an optimistic scenario, EPS for those two years could even reach $350 and $400.
Based on the improvement in earnings sustainability, Bernstein also adjusted its valuation framework. It no longer applies a traditional peak-cycle valuation but instead assigns an 11x multiple to FY28 expected earnings, or a 14x multiple to the average cyclical earnings from FY26 to FY30, resulting in the $3,000 price target.
The report concludes that as an increasing proportion of memory shipments transition to long-term agreements, demand from AI data centers continues to rise, and future revenue predictability strengthens, the memory industry has the potential to gradually shed its traditional label of "high volatility, low valuation." This implies that what the market truly needs to re-price is not just the profit power of SanDisk Corp., but the very cyclical nature of the entire storage sector.
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