Key Points
Micron and Sandisk shares have soared this year amid strong demand for memory chips created by the AI boom.
Memory prices are still up substantially from January 2025, but prices have also retreated from their peak earlier this year.
The memory chip market is highly cyclical, and memory stocks tend to suffer significant losses during industry downturns.
Micron Technology (NASDAQ:MU) and Sandisk (NASDAQ:SNDK) have emerged as major winners of the artificial intelligence infrastructure build-out, and both stocks have delivered exceptional returns for shareholders. In the past year, Micron is up 460% and Sandisk is up 1,190%.
Despite those gains, most Wall Street analysts believe the stocks are undervalued.
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- Sandisk's median target price of $2,225 per share implies 34% upside from its current share price of $1,660.
- Micron's median target price of $1,575 per share implies 50% upside from its current share price of $1,045.
History offers a more sobering perspective. The memory chip industry has long been prone to boom-and-bust cycles. Memory stocks tend to fall sharply during downturns, and the next one may be right around the corner.
Image source: The Motley Fool.
Micron and Sandisk have benefited from higher memory chip prices driven by the AI boom
Central processing units (CPUs) and graphics processing units (GPUs) are logic chips that process data and execute instructions. Both play an essential role in artificial intelligence (AI). CPUs handle general-purpose computing and run applications, while GPUs accelerate demanding tasks by offloading repetitive calculations, such as the matrix and vector math common in AI.
Meera Pandit, global market strategist at JPMorgan Chase, explains:
"CPUs store information in NAND, or long-term memory, and use dynamic random access memory (DRAM), or working memory, to perform tasks. For example, HBM, or high bandwidth memory, is a special kind of DRAM used to feed GPUs data fast enough to keep them busy."
Today, memory chipmakers are struggling to keep pace with demand as hyperscalers race to expand AI infrastructure. A severe memory chip supply shortage has made NAND and DRAM more expensive, with prices increasing 70% and 160%, respectively, since January 2025. Favorable market conditions have translated into strong financial results from Micron and Sandisk.
Micron is the third-largest supplier of NAND and DRAM, and it gained share in both markets during the past year. In the September quarter, revenue rose 379% to $54 billion, and non-GAAP net income soared to $33.42 per diluted share, an 11-fold increase from $3.03 per diluted share in the same quarter last year.
Sandisk is the sixth-largest supplier of NAND, but it did not gain market share over the past year. In the July quarter, revenue rose 372% to $9 billion and non-GAAP net income soared to $39.25 per diluted share, a 135-fold increase from $0.29 per diluted share in the same quarter last year.
History says shares of Micron and Sandisk will fall sharply during the next industry downturn
Unlike logic chips, memory chips are considered commodities because products from one supplier are generally interchangeable with products from another. That means companies like Micron and Sandisk compete primarily on price rather than product differentiation, so they are ultimately at the mercy of supply and demand.
Historically, the memory chip industry has alternated between periods of undersupply and oversupply, causing prices to increase and decrease, respectively. The last boom-and-bust cycle took place during the pandemic. Memory prices increased amid strong demand for consumer electronics, but prices cratered when demand normalized.
Indeed, NAND and DRAM prices dropped about 70% between early 2021 and late 2023. In turn, shares of Micron and Western Digital (NASDAQ: WDC), the former parent company of Sandisk, dropped 50% and 60%, respectively. And those losses occurred despite the stocks having reasonable valuations. After reporting fiscal 2021 financial results, Micron traded at 12 times adjusted earnings and Western Digital traded at 14 times adjusted earnings.
So what? Today, Micron trades at 14 times adjusted earnings and Sandisk trades at 24 times adjusted earnings. Those valuations look tolerable, especially when Micron and Sandisk are expected to report annual earnings growth of 65% and 89%, respectively, through fiscal 2028. But the stocks are more expensive today than they were when the last memory cycle peaked.
NAND and DRAM prices have already declined from their peaks earlier this year, and prices are likely to fall further as memory chip companies expand production capacity. In turn, lower prices will pressure earnings at Micron and Sandisk, and investors may begin pricing in that deterioration well before it appears in their financial results.
Shares of Micron and Sandisk currently trade 14% and 29% below their highs, respectively. But history says both stocks could drop much further as memory chip supply catches up with demand. For that reason, I think investors should keep any positions in Micron and Sandisk relatively small. These stocks look cheap, but that’s because the market is nervous about the cyclical nature of the memory chip industry.
JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase, Micron Technology, and Western Digital. The Motley Fool has a disclosure policy.