There has been a lot of chatter in the market that investors need to be careful of memory stocks following their strong performance, despite the stocks in the sector still trading at cheap valuations. The reason for this is that historically, both the DRAM and NAND (flash) markets have been highly cyclical with very large boom and bust cycles.
However, it is certainly noteworthy that renowned billionaire investor David Tepper of Appaloosa Management increased his exposure to the sector in Q1, buying shares of both Sandisk (SNDK 1.93%) and Micron Technology (MU +0.90%). Micron is Tepper's second-largest position behind Amazon, and in Q1, he increased his shares by 11%. Meanwhile, Sandisk was a new position, representing around 3% of his portfolio. In fact, it was his only new position in the quarter.
Let's look at why Tepper may be attracted to memory stocks even after their strong runs.
Sandisk: A NAND pure play
Sandisk is the market's only pure-play NAND (flash) memory maker after being spun out of Western Digital last year. The company has benefited from surging demand related to artificial intelligence (AI) and flash memory supply constraints, which have pushed up NAND pricing.
NAND is a non-volatile type of memory, which means it retains its data even when the power is turned off. It's slower than volatile DRAM, which loses its data when it is not connected to a power source. As such, NAND is used for longer-term data storage, while DRAM is used for short-term, temporary storage.
The NAND market saw a huge surge during the pandemic, as people largely confined to their homes drove a big uptick in electronics sales. However, this led to a pull forward in demand, and once the pandemic was over, the flash memory market crashed to the point where companies had negative gross margins. This caused the big memory makers to cut NAND production and turn more of their resources to the DRAM market.
NASDAQ: SNDK
Key Data Points
With the rise of that market due to AI, NAND supply has been slow to return, while at the same time, AI training needs massive solid-state drives (SSDs) to hold training data. This dynamic has resulted in surging NAND prices, huge revenue growth, and ballooning gross margins for Sandisk. Citigroup recently said it expects NAND storage prices to be up 186% this year, with SSD prices climbing even higher.
Meanwhile, the company has started to sign longer-term deals of three to five years, which is expected to help lessen some of the cyclical nature of the business and improve its visibility. Citi noted these agreements have predetermined volumes and will afford Sandisk strong gross margins of 80% or more.
Micron: Riding the memory wave
NASDAQ: MU
Key Data Points
Micron is one of the big three DRAM makers, along with its Korean counterparts SK Hynix and Samsung. It gets about 80% of its revenue from DRAM and 20% from NAND. Similar to the NAND market, the DRAM market is experiencing strong demand and supply constraints, driving significant revenue growth and gross margin expansion for Micron.
One of the major drivers of the DRAM market is high-bandwidth memory (HBM). To optimize performance, graphics processing units (GPUs) and other AI chips need to be packaged with HBM, a specialized form of DRAM. This becomes even more important as the market shifts toward inference, since these workloads tend to be more memory-bound than compute-bound. Adding to supply constraints is that HBM requires upwards of three times the wafer space as ordinary DRAM, which leaves the entire DRAM market undersupplied.
Like Sandisk, Micron and its Korean competitors are also starting to sign longer-term (three- to five-year) deals.
Image source: The Motley Fool.
Are the stocks buys?
Both Micron and Sandisk remain attractively valued, trading at forward price-to-earnings ratios of 6.5 and 7.5, respectively, based on fiscal 2027 earnings estimates. Meanwhile, the memory industry is shifting, with both companies being able to sign longer-term deals for the first time ever. This not only creates better visibility, but it also should raise their future earnings floors and lessen the impact of any downturn.
With the DRAM and NAND cycles looking likely to last much longer than most investors expect, you can still dip your toes into these stocks. However, these are not set-it-and-forget-it investments, and investors will need to monitor the supply-demand environment.
