Key Points
SK Hynix reported soaring revenue and profits, and its guidance indicated that investors are underestimating the strength of the memory boom.
Micron now trades at a forward P/E of less than 6 after pulling back from its peak in June.
AI demand will almost certainly grow over the coming years, adding to demand for memory.
It would be odd to say that investors are too pessimistic about a stock that has tripled this year, but that appears to be the case for Micron (NASDAQ:MU).
Shares of the leading memory chipmaker are up 240% this year, but they're down more than 20% since peaking after Micron's fiscal third-quarter earnings report.
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In the months since, investors have hotly debated the sustainability of the memory chip boom, driven by a shortage that has led to sky-high prices. Even as supply-and-demand conditions have tightened since June, investors seem to believe that Micron stock has peaked and that they're better off hedging their bets in anticipation of the cycle's downside.
However, one of the other big three chip companies just reported earnings, and the results and commentary continue to support an extended shortage of memory chips, as Hynix said it expected demand to outpace supply through 2030. Additionally, the company said it was virtually sold out through 2029.
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What the Hynix report showed
Like Micron before it, SK Hynix (NASDAQ:SKHY) reported blockbuster results in its third quarter, with revenue up 328% year-over-year and 32% sequentially, showing that the tailwinds in the industry remain strong even from the previous quarter.
Importantly, prices are still going up as the company reported a high 20% sequential increase in average selling prices (ASP) for DRAM chips, which includes the high bandwidth memory (HBM) deployed at AI data centers, and it had mid-20% sequential growth in NAND, which is typically used for data storage.
Hynix also reported 10% sequential DRAM bit growth, a solid increase in volume, while NAND was down slightly.
The company also made a number of predictions beyond demand exceeding supply through 2030, which Micron investors will want to hear.
Management predicted that the global AI data center infrastructure market will expand by 40% annually through 2030, indicating it would quadruple in four years. It also said that memory demand would exceed earlier expectations as AI takes on longer, more complex tasks, driving a surge in compute and data processing.
At the enterprise level, it said that personal AI would drive near-term growth, while physical AI would broaden the scope of demand over the mid- to long-term.
For next year, the company expects DRAM bit growth in the mid-20 % range and NAND growth in the high-teens range, indicating it will benefit from both volume and pricing growth. That's good news for Micron as well, and seems to indicate that analysts are likely underestimating its growth in fiscal 2028, which begins next September.
What it means for Micron
Micron's stock's weak performance in recent months suggests investors expect the memory shortage to be short-lived and that prices will crash as new capacity comes online.
SK Hynix's report should dispel that notion, and it also indicates that the shortages will continue until at least 2030, meaning they could endure beyond four years from now.
Predicting what happens to AI in that period is nearly impossible, as there is a wide range of factors to account for, but one thing that seems likely is that the technology will continue to advance, which implies greater demand for memory. Physical AI, including robots and self-driving cars, is likely to add to memory demand, as will the broader growth of compute demand, which currently exceeds supply.
Like SK Hynix, Micron is entering into long-term contracts with customers to protect itself against any downside in the memory cycle, which should ensure solid profits through next year.
The stock currently trades at a forward P/E of less than 6, and its EPS estimates could easily go up following Hynix's report.
If shortages endure through 2030, Micron will be able to pay back most of its market cap in profits, if not all of it, in that time period, making the stock look attractive at the current price, especially if it ramps up buybacks.
Based on that valuation and SK Hynix's latest comments, investors still seem overly pessimistic about the memory sector.
Jeremy Bowman has positions in Micron Technology. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.