The hottest segment of the market right now is memory stocks. This once cyclical industry is now entering a supercycle and is one of the most intriguing ways to play artificial intelligence (AI).
The memory market is on fire
The memory market is split into two parts: DRAM (dynamic random access memory) and NAND (flash memory). Given its speed, DRAM is used for short-term memory, while NAND tends to be used for long-term storage since it is slower. Both markets face significant supply constraints, which are leading to DRAM and NAND prices skyrocketing.
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For AI chips to perform optimally, they need to be packaged with a special form of DRAM called high-bandwidth memory (HBM). When integrated with HBM, graphics processing units (GPUs) and other AI chips can perform calculations faster because they can quickly store, retrieve, and transfer data using the HBM component. Given the AI infrastructure buildout, HBM, unsurprisingly, is in high demand.
Adding to the market dynamics is that HBM uses three to four times the wafer capacity of conventional DRAM. This is causing a supply shortage across the entire DRAM industry, which is leading to soaring prices not just for HBM, but for the entire DRAM market.
Flash memory, meanwhile, is also in tight supply. The NAND market became very oversupplied a few years ago, and prices crashed to the point where gross margins turned negative. Given this, memory companies began redirecting resources to other areas, lowering their production capabilities. However, with the rise of AI, demand for massive, high-performance solid-state drives (SSDs) using flash memory to store training data began to skyrocket. With memory leaders focused largely on their HBM opportunity, production hasn't come back, and now NAND prices are also through the roof.
Two of the companies best positioned to take advantage of these market dynamics and ready for a bull run are Micron Technology (MU 9.55%) and Sandisk (SNDK 15.95%).
NASDAQ: MU
Key Data Points
Micron: A leader in HBM
Micron is a leader in HBM and DRAM, although it also gets about 20% of its revenue from NAND. Its HBM production is basically sold out for this year, and it expects demand to grow at a 40% clip over the next few years.
With DRAM prices climbing, the company is seeing strong revenue growth. More importantly, it's also seeing huge margin expansion, with its gross margin surging from 38.4% a year ago to 56% last quarter. While it is investing to increase capacity, expect the market to remain tight and for the company to see huge growth in the coming years.
NASDAQ: SNDK
Key Data Points
Sandisk: A flash memory leader
Sandisk is a pure-play way to invest in the current NAND environment. Like Micron, its revenue and margins are soaring. Last quarter, its revenue jumped 76%, but its adjusted earnings per share climbed fivefold. Its gross margins surged from 32.3% last year to 50.9%.
With demand for NAND increasing and supply likely to remain extremely tight for the foreseeable future, especially as memory companies focus more on HBM, Sandisk has a lot of growth still ahead of it.
