Wall Street: Storage stocks have 70% upside potential

In the first half of this year, SanDisk, Micron Technology, Seagate Technology and Western Digital were among the best-performing stocks on the US stock market, as the demand driven by artificial intelligence infrastructure construction seemed endless.

However, the market sentiment has shifted since then. The share prices of AI component manufacturers in the semiconductor and memory sectors have come under pressure, as investors have grown doubtful about the sustainability of huge spending commitments. As a result, SanDisk, Micron, Seagate and Western Digital all ranked in the bottom 10% of S&P 500 Index constituents in terms of performance in the second half of 2026, and even results far exceeding expectations were not enough to reverse this trend.

Joe Tigay, portfolio manager at Equity Armor Investments, said: "The market is telling you that investors' expectations for how long the earnings boom of these companies can last are changing."

This phenomenon was particularly prominent last week. Western Digital released results and guidance far exceeding market expectations after market close last Thursday, and the company also raised its dividend, but its share price still fell by 3% last Friday due to market concerns that AI spending has peaked. At the end of September, Micron reported profits and revenue both beating expectations, with its business outlook far better than forecast, but its share price has dropped by 15% since then.

SanDisk is set to release its earnings report this Thursday, with its earnings per share expected to surge by more than 6100% year on year.

Andre Bakhos, president of Ingenium Analytics, said: "What can get it back on track? It takes not only excellent performance, but also the visibility that such strong performance can continue in the next quarter and even the quarter after that."

AI Spending Continues to Rise, Investors Are More Focused on Returns

In the short term, the massive AI spending driving the growth of these companies does not appear to be slowing down. Last week, Meta raised its capital expenditure plan for this year. Wall Street expects that Microsoft, Amazon and Alphabet will maintain or raise their respective AI spending plans when they release their earnings reports this week.

On Monday, Anthropic filed its highly anticipated initial public offering (IPO) application documents, and the market expects this listing to demonstrate the lasting resilience of the AI investment boom and drive up memory and storage stocks.

The problem is that investors are increasingly skeptical about whether these AI expenditures can generate returns, especially now that a considerable part of this capital comes from debt. For example, after Meta disclosed its capital expenditure expectations, an indicator measuring its credit risk hit an all-time high. Coupled with the severe economic environment of high oil prices and high interest rates, the market's pessimism is not difficult to understand.

This also explains why the once surging memory and storage stocks have now lost their momentum. Since the start of the third quarter, the share prices of both SanDisk and Western Digital have fallen by more than 44%, Seagate by 33%, and Micron by 22%. Although this has eroded part of their gains since the start of the year, these stocks still recorded significant increases in 2026.

Bakhos said: "In the past, investors had a highly concentrated 'fear of missing out' mentality for memory stocks, but now they are starting to weigh the risks of these huge expenditures and discuss whether such investment can be sustained."

In other words, to extend the rally, these companies need further confirmation from big AI spenders. If these key large clients can convince investors that the investment is translating into profits, market confidence in memory and storage stocks should strengthen, as that means capital expenditure will remain at a high level.

Tigay said: "In the short term, the fundamental logic seems largely intact, but the risks are obvious, and the bearish case still holds. If these big AI spenders fail to meet expectations, demand could drop off a cliff."

According to analyst forecasts, the growth of Seagate and SanDisk will slow down in the next few years. Seagate's revenue for fiscal year 2027 ending June 2027 is expected to grow by about 56%, before slowing to 37% and 20% in fiscal year 2028 and fiscal year 2029 respectively. SanDisk is also projected to see its fiscal 2027 revenue jump by 140%, but the growth rate is expected to drop to 20% in fiscal 2028, and may even decline by 7% in fiscal 2029.

Low Valuation Leaves Room for Upside, Cyclical Risks Remain to Be Seen

One positive factor for this type of stock is that their valuations are not expensive. Micron's 12-month forward price-to-earnings ratio stands at 5 times, making it the second lowest P/E ratio among S&P 500 Index constituents, only higher than that of Charter Communications; SanDisk follows closely with a forward P/E ratio of less than 6 times.

Meanwhile, Western Digital and Seagate have forward P/E ratios of around 12 times and 15 times respectively. The valuations of these companies are all lower than the broader market: the S&P 500 Index has a forward P/E ratio of about 19 times, while the tech-heavy Nasdaq 100 Index trades at roughly 20 times.

Although some Wall Street professionals warn that such a low P/E ratio could be a warning sign given that memory demand has historically been cyclical, the sheer scale and volume of this round of AI infrastructure construction could make the cycle incomparable to previous ones.

The target price set by analysts for Seagate implies that its share price is expected to rise by more than 70% in the next 12 months, while SanDisk's expected upside exceeds 80%. Data shows that among the 74 stocks in the S&P Information Technology sector, Micron, Seagate, SanDisk and Western Digital all rank in the top seven in terms of potential returns.

Bakhos said: "It is reasonable for people to feel nervous when seeing a sell-off, because you cannot tell whether this is a peak, or just a temporary release of some pressure before a new round of rally. For now, profit-takers have the upper hand, but I believe long-term holders are still in a favorable position."

This article is from the WeChat official account "CLS", written by Zhao Hao, and published with authorization from 36Kr.