Micron and Sandisk Have a History of Cyclicality. Is This Time Different?

The memory chip industry has long been known for its cyclical nature, which can cause investors to be hesitant when companies like Sandisk and Micron are performing well, fearing the next downturn. Typically, these stocks are undervalued compared to their tech sector counterparts. However, a significant change is currently occurring in the market, prompting the question: is this time truly different?

There are two main types of memory chips: DRAM and NAND. Sandisk and Micron both produce NAND flash memory, which is primarily used for long-term data storage in solid-state drives. DRAM, on the other hand, is faster but loses data when power is cut, and is used in computer RAM. High bandwidth memory (HBM), a subset of DRAM, is commonly found in AI computing devices like GPUs, and only Micron produces this technology.

While NAND memory lacks distinguishing features, demand remains strong and expected to remain so in the near future. Micron has recently secured a deal with Nvidia to develop a custom HBM solution for GPUs, marking a significant transformation in the industry. Additionally, Micron and Sandisk have begun entering into strategic agreements that set long-term price floors and ceilings, reducing the commodity-like pricing of memory chips.

These companies are also locking in committed sales volumes and structured pricing mechanisms for a significant portion of their production volume, signaling a shift away from the volatile pricing in the memory market. As a result, these businesses may start to be valued more like regular tech stocks, rather than highly cyclical commodities.

Despite their stocks appearing cheap based on fiscal year earnings projections, it remains uncertain if their valuations will significantly increase. Nonetheless, with the cyclical nature of these companies starting to fade, they seem like smart investment opportunities at the moment.