This AI Stock's Valuation Makes No Sense to Me. Here's Why That's a Good Thing.

The meteoric rise of Sandisk (NASDAQ: SNDK) stock almost seems unbelievable.

If you had bought in at the initial public offering (IPO) in February 2025 at about $36 per share, you would have seen the shares skyrocket almost 4,100% to their current price of about $1,480. This year alone, Sandisk stock has risen roughly 520% as of May 22.

So, if you had bought 100 shares at the IPO, that $3,600 investment would be worth more than $148,000 right now.

Sandisk is in the middle of the memory chip supercycle as a leading manufacturer of NAND drives and solid-state drives for data centers, artificial intelligence (AI) computing, mobile phones, video game consoles, and other applications.

It is capitalizing on the next wave of AI. As hyperscalers are building out their infrastructure to handle the huge need for AI computing, they now require capacity for memory and storage.

But the thing is, the supply of memory and storage chips can't keep up with the demand. Sandisk has already sold out its NAND flash drives for 2026 and is rapidly booking backlog for 2027 and beyond. This has created incredible pricing power for Sandisk and has caused its stock price to go through the roof.

The recent fiscal third quarter, which ended April 3, marked a continuation of the incredible growth that Sandisk has experienced. Its revenue rose 97% from the previous quarter to $5.9 billion -- that's 97% just from Q2. Year-over-year revenue spiked 251%. Net income increased 350% from the previous quarter to $3.6 billion, or $23.03 per share. This has lifted the gross margin to a ridiculous 78.4% from 50.9% the previous quarter.

How is Sandisk still cheap?

And Sandisk expects revenue to keep charging higher. For the fiscal fourth quarter, Sandisk anticipates revenue of between $7.75 billion and $8.25 billion. That would represent a 36% increase over last quarter at the midpoint. And the gross margin is targeted to rise to between 78.9% and 80.9%. That means that roughly 80% of the revenue it generates from its products and services sales is profit after subtracting the costs of producing those goods.

The growth numbers and the 4,000%-plus return for Sandisk stock are amazing.

But what's more amazing is that the stock is still relatively cheap. How is that possible?

Sandisk, despite this unbelievable rise in its stock price, is still trading at just 23 times forward earnings. That is below the average forward price-to-earnings (P/E) of the Nasdaq-100. And that is up from a forward P/E ratio of just 13 at the end of the first quarter.

That is a lower valuation than all of the "Magnificent Seven" stocks; it's even lower than a consumer staple like Walmart. How does this make sense?

Rational exuberance

It shouldn't make sense, because typically when a stock has a run like this, it's overbought and subject to a lot of irrational exuberance that causes it to trade at such a premium.

In the case of Sandisk, it is very rational exuberance. That's because the rapid increase in the share price has been supported by a meteoric rise in earnings. And its outlook, which calls for continued rapid earnings growth, makes the stock very reasonably valued.

At some point, the growth rate will start to decelerate. In fact, the company's Q4 outlook shows its growth rate slowing a bit. Mind you, the company still expects 36% quarter-over-quarter revenue growth, which is unheard of for most companies, but that is down from the off-the-charts 97% growth last quarter.

But right now, Sandisk is still a good value. And with this memory supercycle still raging, Sandisk, incredibly, still has more room to run. This is obviously a very good thing for investors.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.