Sandisk (SNDK 13.27%) stock sold off for a second straight day Thursday -- but why?
Shares of NAND semiconductor memory chip manufacturer tumbled 9.6% through 11:15 a.m. ET after Taiwan Semiconductor Manufacturing Company (TSM 3.12%) beat analyst estimates in its Q2 earnings report, growing profits 77% year over year. But TSMC also warned investors will spend upwards of $60 billion on capital investment this year, versus prior forecasts of about $54 billion.
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Good news for TSMC isn't bad news for Sandisk
Investors punished TSMC with a 2.2% sell-off today despite the good earnings news -- worrying TSMC's spending too much expanding capacity, and hurting its free cash flow. And yet, many of the chips TSMC is producing are CPUs and GPUs for artificial intelligence customers, and these chips will need to be paired with NAND flash memory chips from Sandisk to perform their functions.
In other words, more investment and more chip production from TSMC should increase demand for Sandisk chips and increase Sandisk's profits.
NASDAQ: SNDK
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What's next for Sandisk
Viewed from that perspective, TSMC's decision to invest heavily in expanding chip production for its customers isn't bad news for Sandisk at all. It speaks to the continued strength of demand for semiconductor chips to AI applications, and supports the thesis that demand for memory chips (for the same purpose) continues to grow -- and Sandisk's profits alongside.
Granted, Sandisk's profits can't expand forever. Granted, competition is growing, and TSMC's investment plans are a big example of how other companies -- including Sandisk's competitors -- are expanding production. Eventually, this will result in the usual cyclical effect of supply catching up with demand, chip prices falling, and profit margins eroding.
But that's not happening today. For the time being at least, Sandisk's profits look safe.
