The memory industry is expected to win big from the growing proliferation of artificial intelligence (AI) as the technology is expected to create huge demand for both storage and compute solutions, and this explains why shares of South Korean memory manufacturer SK Hynix surged recently.

SK Hynix released its second-quarter 2023 results on July 26. The company remarked that the "demand for AI server memory has increased rapidly" amid the growing adoption of generative AI applications such as ChatGPT. The company backed up this claim with some solid numbers, pointing out that its revenue increased 44% sequentially thanks to a surge in demand for high-bandwidth memory (HBM) and DDR5 dynamic random access memory (DRAM), which are deployed in AI servers.

Hynix now expects sales of these high-end DRAM chips to more than double in 2023 amid the AI boom. This indicates that AI could bring an end to the slump in the memory market, which has been in a state of disarray in recent quarters on account of weak demand and oversupply. This is good news for Micron Technology (MU 0.30%), a chipmaker that could take advantage of the AI-driven memory demand. Let's look at the reasons why.

The memory industry is expected to get a big boost from AI

Plunging sales of personal computers (PCs) and smartphones have led to a sharp decline in memory prices in recent quarters. For instance, the contract price of 8-gigabyte (GB) DDR5 RAM was down 43% in 2022. The pricing of NAND (short for "NOT AND") flash storage also plunged last year. These factors have weighed heavily on Micron Technology's performance, causing a steep decline in the company's revenue and forcing it into a loss.

Micron's revenue in the third quarter of fiscal 2023 (for the three months ended June 1, 2023) was down a whopping 57% year over year to $3.75 billion. The memory specialist reported an adjusted loss of $1.43 per share for the quarter compared to a profit of $2.59 per share in the year-ago period. However, SK Hynix's latest results indicate that memory prices may finally be improving.

Hynix's operating margin in the second quarter came in at a negative 39%, a big improvement over the reading of negative 67% in the first quarter of the year. The company credited the sequential revenue improvement to a jump in the average selling price (ASP) of DRAM despite the challenging PC and smartphone markets. Management clearly pointed out that overall DRAM ASP rose during the quarter due to "increased sales in high-end products used for AI servers."

This is good news for Micron Technology. The company has already pointed out that "AI servers have six to eight times the DRAM content of a regular server and three times the NAND content," and Hynix's results lend credibility to Micron's claims. More importantly, it won't be surprising to see a turnaround in Micron's fortunes thanks to AI, as the company indicated on its June earnings conference call that its chips are being deployed by the likes of Nvidia, which is leading the race in AI chips.

It is also worth noting that Micron is looking to push the envelope in the AI memory market through its product development moves. The company has just revealed that it is "sampling the industry's first 8-high 24GB HBM3 Gen2 memory with bandwidth greater than 1.2TB/s and pin speed over 9.2Gb/s." The chipmaker claims that these numbers are a 50% improvement over the current HBM solutions on the market, and they are also more power-efficient with a 2.5x jump in performance per watt as compared to prior generations.

Micron adds that these gains will help reduce the training times of large language models, so it won't be surprising to see them being deployed extensively by customers such as Nvidia. Not surprisingly, third-party estimates suggest that AI could turn out to be a key growth driver for the memory industry in the long run. According to Fortune Business Insights, the memory market could generate annual revenue of $360 billion in 2029, increasing at an annual pace of nearly 15% from last year's revenue of $136 billion.

Micron controls a nice chunk of the memory market, and it has been increasing its share of the same, so it should ideally witness a nice jump in revenue in the long run.

MU Revenue Estimates for Current Fiscal Year Chart.

MU Revenue Estimates for Current Fiscal Year data by YCharts.

Moreover, an improvement in memory pricing should give a nice boost to the company's bottom line as well.

MU EPS Estimates for Current Fiscal Year Chart.

MU EPS Estimates for Current Fiscal Year data by YCharts.

Micron stock is a terrific buy right now

Micron Technology stock has shot up 40% this year. Despite that, the stock is trading at a quite reasonable 4 times sales, which is not surprising given the steep decline in the company's revenue and earnings. However, as the charts above indicate, Micron's financial performance is expected to improve drastically in the next fiscal year and beyond.

That's why investors who are looking for an AI stock that's trading at a relatively cheap valuation right now but could explode in the long run should consider buying Micron before it flies higher. After all, Micron's price-to-sales ratio suggests that it is trading at a massive discount to other AI stocks such as Nvidia, Microsoft, and C3.ai, as these companies sport sales multiples of 44, 12, and 17, respectively. However, that may not be the case for long as Micron's AI prospects could supercharge the stock and send it soaring.