Sandisk Earnings Review: A Stunning $42B RPO, But Margins May Be Peaking

The quarter was a blowout. Revenue was $5.95 billion, up 97% QoQ and 251% YoY. Non-GAAP gross margin reached 78.4%, far above the prior guide of 65% to 67%. Non-GAAP EPS was $23.41, compared with prior guidance of $12 to $14. 

Free cash flow quality was also strong. Adjusted free cash flow was $2.955 billion, equal to a 49.7% margin. Operating cash flow was $3.038 billion, while net cash capital spending was only $83 million.

Fiscal Q4 guidance implies the cycle is still accelerating

Fiscal Q4 guidance was very strong: revenue of $7.75 billion to $8.25 billion, non-GAAP gross margin of 79% to 81%, and non-GAAP EPS of $30 to $33. That implies another large sequential revenue step-up and sustained gross margin near 80%. 

Management said Q4 growth should come from both bit growth and higher pricing. This matters because it suggests the next quarter is not only a pricing story, but also a supply and mix story, including QLC Stargate ramp and continued enterprise SSD demand.

FOUR Things to Watch

AI data center is now the core growth engine

Data center revenue grew 233% sequentially to $1.467 billion, driven mainly by strong demand for TLC-based enterprise SSDs. Management framed data center as Sandisk's fastest-growing and most strategic market, supported by AI inference, reasoning workloads, agentic AI, KV cache and RAG. 

The company's argument is that larger models, longer context windows and more real-time inference workloads require large amounts of high-performance, low-latency NAND. In management's words, NAND is becoming a critical part of AI infrastructure, not just a traditional storage component.

The next product catalyst is QLC Stargate, which is expected to begin shipping for revenue in fiscal Q4. The company positioned TLC and QLC as complementary: TLC for high-performance compute-focused enterprise SSDs, and QLC for higher-density data center storage use cases.

New Business Models are the biggest strategic update

The most important update was the new business model, or NBM, structure. Sandisk has now signed five multi-year partnerships, including three in fiscal Q3 and two more so far in fiscal Q4. These agreements are designed to lock in customer supply and Sandisk economics, with customer commitments backed by firm financial guarantees. Management said the longest agreement runs up to five years. 

The three contracts signed during Q3 provide about $42 billion of minimum contractual revenue. Important detail: that $42 billion only reflects the three Q3 deals, not the full five deals. The five signed agreements include more than $11 billion of financial guarantees, including $0.4 billion of prepayments already on the Q3 balance sheet. 

The five agreements already cover more than one third of fiscal 2027 bits, and management expects that percentage to increase as more agreements are signed. This is the key reason management believes the NAND business can become less cyclical and more predictable. 

Are margins already close to peak?

The other side of Sandisk's stunning quarter is that profitability may already be approaching peak-cycle levels. Adjusted gross margin has moved from 22.7% in FY2025 Q3 and 51.1% in FY2026 Q2 to 78.4% in FY2026 Q3, while adjusted operating margin expanded from 37.5% to 70.9% in just one quarter. For fiscal Q4, management guided to 79% to 81% non-GAAP gross margin, and based on the midpoint of revenue guidance and operating expense guidance, adjusted operating margin could reach roughly 73.9%.

That is both bullish and risky. The bullish interpretation is that Sandisk's mix shift, AI-driven enterprise SSD demand and NBM contracts are creating a structurally higher-margin business. The cautious interpretation is that the stock may now be judged against an unusually high profitability base. Once gross margin is already near 80%, the next phase of upside has to come more from revenue scale, RPO growth and contract durability than from further margin expansion.

Capital allocation turned shareholder-friendly

Sandisk ended the quarter with $3.735 billion of cash and equivalents, repaid the remaining debt balance, and announced a $6 billion share repurchase program with no expiration date. Management framed this as the next step after reaching its net cash target. 

The buyback is meaningful because it signals management sees the current earnings power as cash-generative enough to support both growth investment and capital return.

Summary

Sandisk's latest quarter was a genuine fundamental reset: revenue nearly doubled sequentially, gross margin moved to almost 80%, adjusted EPS beat by about 60%, and fiscal Q4 guidance implies another major step-up. 

The biggest question now is whether an 80% gross margin and a 70%-plus operating margin are sustainable, or whether FY2026 Q4 could represent the near-term profitability peak of this NAND upcycle. Management said it believes margins are sustainable, but until Sandisk proves that these levels can hold beyond the current pricing squeeze, peak-margin risk will remain the key bear argument.

Gamma exposure shows the stock is currently trading in a positive-gamma zone. The post-market price is around $1,030, still above the gamma flip level near $996, meaning dealer hedging flows may help dampen volatility rather than amplify it. The key downside level is the $1,000 put wall, which could act as an important support area if the stock pulls back. On the upside, the largest call concentration sits near the $1,200 call wall, making that the next major resistance or magnet level if momentum continues.

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