Why I Short SanDisk (Part 1): The Unchangeable Cyclicality of SanDisk's Business

$Sandisk(SNDK.US) $Micron Tech(MU.US) have obvious cyclicality in their businesses and are considered cyclical stocks.

1. What is a "Cyclical Stock"?
The definition of a cyclical stock is not "stock price volatility," but rather:
Company profits are highly dependent on the macroeconomic cycle or industry supply-demand cycles.
Its characteristics are:
High revenue volatility
Significant fluctuations in gross margin
Profits can swing from huge losses → massive profits → back to losses
Stock price leads the reversal in fundamentals
Typical industries:
Semiconductors
Steel
Shipping
Chemicals
Commodities
2. Why is SanDisk a cyclical stock?
The SanDisk referred to here is the memory business entity (NAND Flash business).
SanDisk's core business:
NAND Flash
SSD
Memory chips
And NAND is a typical strongly cyclical product.
3. What is the nature of the NAND cycle?
The memory industry is a "supply-driven cycle."
The cycle is determined by three things:
Capacity expansion pace
End-market demand
Inventory cycle
① Supply Side: Capacity expansion has a lag
Memory fab expansion:
Huge investment (billions of USD)
Construction cycle of 1-2 years
Capacity cannot be adjusted quickly
When prices rise:
All manufacturers expand capacity
Future capacity is released in a concentrated manner
Oversupply
Prices crash.
② Demand Side: Strong volatility
NAND demand comes from:
PCs
Smartphones
Servers
Data centers
When the economy slows down:
Companies reduce IT spending
Consumer electronics sales decline
Demand suddenly contracts.
③ Inventory Cycle
Memory chips have a clear inventory chain:
Wafer fab → Module makers → OEMs → End-users
Once end-user sales drop:
OEMs stop placing orders
Module makers destock
Chipmaker orders plummet
This causes:
Revenue crash + price stampede
4. How does the cycle manifest in financial reports?
At the peak of the cycle:
ASP (Average Selling Price) rises
Gross margin 40%+
Explosive growth in net profit
At the bottom of the cycle:
ASP crashes
Gross margin turns negative
Massive losses
This is why:
Memory companies can go from "huge losses" to "massive profits" a year later.
5. How long is the cycle?
Typical memory industry cycle:
2–4 years per round
Recent rounds:
2017–2018 High prosperity
2019 Downturn
2021 Another peak
2022–2023 Deep downturn
2024–2025 Recovery
This kind of rhythm is structurally repetitive.
6. Why is it not a "Growth Stock"?
Compare it with NVIDIA:
NVIDIA:
Has technological barriers
Has pricing power
Long-term upward trend in gross margin
Structural growth (AI demand explosion)
Whereas SanDisk:
Products are standardized
Prices fluctuate with supply and demand
No long-term stable pricing power
Profits swing with the cycle
This is the core difference between "Growth Stock vs. Cyclical Stock."
7. How to understand the word "Cycle"?
Cycle = Supply-demand mismatch + Investment lag + Price volatility
It's not emotional volatility.
It is:
Capital expenditure — Capacity release — Price collapse — Production cuts — Price recovery
A mechanical economic loop.
8. The correct way to invest in cyclical stocks
Cyclical stocks cannot use the "long-term hold growth logic."
Instead:
Position during industry loss periods
Add positions during the initial phase of price reversal
Reduce positions during profit explosion periods
The core is:
Buy during losses, sell during high profits
Because:
Stock prices always lead profits by 6–9 months.
9. Summary
SanDisk's issue is not "company problems," but rather "the industry is inherently cyclical in structure."
Its volatility is not a management problem, but determined by the industry's nature.