While Nvidia is often seen as the front-runner in AI infrastructure development, its stock performance over the past year hasn’t been the strongest in the industry. Nvidia has experienced a solid 60% rise during this time, but Micron Technology (MU +7.72%) has surged by 300%, and Sandisk (SNDK +9.81%) has gained nearly 1,400%.
Both Micron and Sandisk are benefiting from robust trends in the memory market, though they focus on different segments. Notably, despite these impressive gains, both companies still trade at relatively low forward price-to-earnings (P/E) ratios. Micron’s forward P/E stands at 3.7 times the fiscal 2027 earnings estimates, while Sandisk is at an 8 times multiple for its fiscal 2027.
Despite strong growth and seemingly appealing valuations, assessing whether these stocks are wise investments at current prices is more intricate. Let’s explore their journeys and future prospects.
Riding the Memory Wave
The memory market consists of two main segments. DRAM (dynamic random access memory) enhances computing speed but is volatile, losing all data once power is cut. In contrast, NAND, or flash memory, is slower than DRAM but retains data even without power.
Manufacturing DRAM is more complex, which has created an oligopoly dominated by Micron, along with Korean giants Samsung and SK Hynix. These three companies have seen their revenues and gross margins soar due to a current shortage in the DRAM market.
For optimal performance, AI chips and graphic processing units (GPUs) require a specific DRAM type known as high-bandwidth memory (HBM), which facilitates quick data retrieval and storage. This has fueled demand, contributing to rising DRAM prices. Meanwhile, NAND memory has also seen a price surge, driven by increased demand for solid-state drives (SSDs) as AI data centers expand, benefiting Sandisk, a NAND specialist.
Where Do the Memory Makers Go From Here?
Micron and Sandisk’s low trading multiples stem from the historical cyclicality of memory markets, characterized by pronounced boom-and-bust cycles. Investor confidence is low regarding the sustainability of current earnings. Moreover, developments like Alphabet‘s TurboQuant algorithm, which could potentially minimize cache memory requirements, have added pressure to stock prices.
Nonetheless, the ongoing memory supercycle is driven by the significant growth in AI, particularly for HBM, closely tied to GPU usage. Unlike prior cycles, the demand for HBM is leading to longer-term contracts of three to five years, potentially stabilizing the industry for companies like Micron.
Both Micron and Sandisk need to pivot away from their cyclical reputations to achieve further growth. In my opinion, Micron is closer to achieving this, having already inked a five-year contract for HBM. Should such contracts become standard, Micron could command a higher multiple, making it a more favorable investment compared to Sandisk.
