Sandisk Stock Is Up 770% This Year and Polymarket Just Called It "the Most Overbought Stock in History." Here's the Case for Buying Anyway.

Sandisk (NASDAQ: SNDK) stock continues its epic run, defying all expectations. Shares of the artificial intelligence (AI) infrastructure company are up 726% this year, making Sandisk the best-performing stock in the Nasdaq-100.

But that performance is also bringing out some skeptics. Polymarket, which runs a popular prediction markets platform, announced in a social media post that Sandisk is "officially the most overbought stock in history."

The platform cited Sandisk's relative strength index (RSI), a technical stock analysis tool that measures the speed and magnitude of price changes to indicate whether a stock is overvalued or undervalued. RSI operates on a scale of 1 to 100. Readings over 70 are considered overbought and potentially overvalued. Sandisk's RSI was 99.

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If you follow technical analysis, the RSI is a red flag indicating that Sandisk stock has become disconnected from its fundamentals and is at risk of a rapid price correction.

But I don't think that tells the whole story behind Sandisk. Relying exclusively on technical analysis means trying to predict a stock's future based solely on historical data. And I don't think you can do that with Sandisk, which occupies a unique position in the market today.

What the "overvalued" argument ignores

AI is arguably the biggest driver in the stock market today, helping push the S&P 500 to a series of new highs over the last several months. Major tech stocks, as represented by the "Magnificent Seven" grouping of the biggest tech companies, are all deeply immersed in AI, and those companies have taken an outsize weighting in the market-cap-weighted index.

Sandisk's role in the AI build-out is as a pick-and-shovel infrastructure stock. The company makes products for flash and advanced memory computer storage, and its technology can be used in everything from phones to laptops and smart devices. But its data center segment is what's really driving the stock's explosion. Sandisk's storage solutions are increasingly used in data centers to house the data needed to run high-level AI programs.

Earnings for the fiscal third quarter (ended April 3) included revenue of $5.95 billion, up 251% from a year ago. Sandisk reported net income of $3.6 billion, versus a loss of $1.9 billion a year ago, and earnings of $23.03 per share.

Sales in the data center segment were $1.46 billion, up 645% from a year ago and 233% from the previous quarter. "This quarter marks a fundamental inflection point for Sandisk -- where our technology leadership is enabling a deliberate shift in our mix toward the highest-value end markets, led by Datacenter," CEO David Goeckeler said.

So, there's an amazing story behind Sandisk's growth. But if you only follow purely technical analysis, you're not seeing -- or are disregarding -- that story and just following the numbers on a graph. And I don't think that's the best way to invest.

How can technical analysis and studying chart patterns accurately predict what's happening with Sandisk when the company is in a unique position? Remember, this is a company that was spun off from Western Digital just over a year ago. And since that spinoff, Sandisk stock is up 5,370%.

Now, I will say that Sandisk is expensive right now. Its forward price-to-earnings ratio of 34.7 is rich compared with big, flashy tech companies like Nvidia (23.3) and Alphabet (24.6). But it's not out of line, especially when you consider that Sandisk is growing its revenue at a triple-digit pace and its data center business is on fire.

The bottom line -- yes, Sandisk is a little expensive today, but it's not outrageously so. And its elevated RSI doesn't necessarily mean that Sandisk has become detached from what's actually happening with the business. It's still a buy for me.

Patrick Sanders has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Western Digital. The Motley Fool has a disclosure policy.