Memory prices have been exploding higher over the past year, and with it so have the stocks of DRAM (dynamic random access memory) makers Micron Technology (MU +0.92%) and SK Hynix (SKHY +0.67%). However, the memory market is notoriously cyclical, and many investors are already questioning how long the good times will last for these AI stocks.
The typical memory cycle tracks a pattern of booming prices, followed by customers over-ordering, manufacturers increasing capacity, and then prices collapsing. The up cycle generally lasts a year or two, with DRAM makers seeing surging revenue and ballooning gross margins, followed by steep revenue and margin declines as new capacity floods the market.
Image source: The Motley Fool.
However, this does not look like your ordinary DRAM cycle. Past DRAM supercycles have historically been driven by surging demand for personal devices that use DRAM, such as smartphones and computers. The current DRAM supercycle is directly linked to the AI build-out. Unlike demand for personal devices, which cools off as consumer adoption matures, AI memory demand is being fueled by an arms race where tech giants must continuously expand compute capacity just to stay competitive.
The reason for this is that graphics processing units (GPUs) and other AI chips need to be packaged with high bandwidth memory (HBM), a special form of DRAM, to reduce latency and optimize performance. As such, demand for HBM is moving in lockstep with demand for overall AI computing power, which continues to surge. With the big three DRAM makers, which also include conglomerate Samsung Electronics in addition to SK Hynix and Micron, all focused on increasing HBM capacity, the overall DRAM market remains undersupplied.
NASDAQ: MU
Key Data Points
At the same time, there are a few obstacles keeping DRAM makers from quickly ramping up capacity. First, the critical components of HBM and advanced logic chips, like GPUs, both use extreme ultraviolet lithography (EUV) in the manufacturing process, and there is only one company in the world, ASML Holding, that makes these machines. With foundries and DRAM makers both needing EUV machines, there is a limit to how much DRAM capacity can increase.
On top of that, HBM requires upwards of three times the wafer capacity as ordinary DRAM, which slows down capacity additions, as well. Clean room space also takes years to be built out, and foundries also need to build out more advanced packaging capabilities.
Peak earnings?
Right now, analysts have Micron's earnings peaking at $170.70 per share in fiscal 2028 ending August 2028, before falling to $121.77 per share in fiscal 2029 and then settling around a normalized level of around $50 per share. SK Hynix earnings are expected to hit $42.21 per share in 2028, and there aren't any outer-year estimates for its ADRs. However, SK Hynix management has said it does not see DRAM supply catching up to demand until at least 2030 at the earliest.
Now, another wrinkle to the market is that the big memory makers have all started to sign long-term, multi-year contracts for the first time ever. SK Hynix recently inked contracts worth $750 billion to supply customers with memory chips, including $500 billion from Nvidia. It and Nvidia will also work to co-develop next-generation memory linked to the chip giant's AI infrastructure roadmap.
NASDAQ: SKHY
Key Data Points
Overall, the big three DRAM makers are all now looking to sign three- to five-year deals. Micron has said it has signed non-cancellable, long-term deals with 16 customers running through 2030 with defined price ranges that have a floor and ceiling. These contracts represent about 40% of its revenue. SK Hynix, meanwhile, reportedly does not have a price cap with its agreements.
How well Micron and SK Hynix perform in the coming years will largely be based on the length of the memory cycle and how soft the landing is. The new long-term contracts and source of demand from AI should make this cycle different from any in the past, as it is coming with a structural shift, but it is still likely a cycle.
In my view, the DRAM cycle is likely to extend a little longer than most analysts are anticipating, which should bode well for the stocks. Meanwhile, given its HBM leadership and ties to Nvidia, I think SK Hynix looks like the best memory stock to own over the long run.
