Better Memory Stock: SK Hynix vs. Micron

The memory market is dominated by three large players: pure-play memory makers SK Hynix (NASDAQ: SKHY) and Micron Technology (NASDAQ: MU), as well as the conglomerate Samsung. Combined, the three control over 85% of the DRAM (dynamic random-access memory) market and more than 60% of the NAND (flash) market.

Soaring demand from the artificial intelligence (AI) infrastructure build-out has created a significant supply-demand imbalance in the memory market, which in turn has driven surging memory prices. Much of this stems from the need for high bandwidth memory (HBM), a specialized form of DRAM packaged with graphics processing units (GPUs) and other AI accelerators to reduce latency and ensure these expensive chips aren't left idle due to memory bottlenecks. Demand for HBM is growing in lockstep with demand for compute power, leading the big three memory makers to concentrate their resources on HBM.

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However, the ability to increase HBM capacity is limited. ASML is the only company in the world that makes the extreme ultraviolet (EUV) lithography machines needed to manufacture critical HBM components. Meanwhile, these are the same systems needed to make GPUs and other advanced logic chips.

With foundries and memory makers competing for a limited number of new EUV machines, they are unable to keep up with demand. On top of that, HBM requires roughly three times the wafer capacity as ordinary DRAM, adding to the constraints.

With the big three memory makers focused on increasing HBM capacity, the supply-demand balance has also spread to conventional DRAM and NAND. NAND, meanwhile, is seeing huge demand come from the need for massive solid-state drives (SSDs) that store AI training data. As a result, conventional NAND and DRAM prices have risen faster than HBM prices.

This is important when comparing SK Hynix and Micron and determining which looks like the better AI stock to own.

SK Hynix vs. Micron

SK Hynix is the market leader in HBM and the memory maker that derives the largest percentage of its revenue from advanced memory. In Q2, it held a 25% share of the DRAM market and a 50% share of the HBM market. It also held a 19% share of the NAND market. The company is the main HBM supplier to Nvidia, and the two companies have a partnership in which Nvidia has locked up $500 billion in future memory commitments.

This compares with Micron, which captured a 24% share of the DRAM market in Q2 but only 18% of the HBM market. Samsung held the other 33% share in the HBM market. Meanwhile, Micron had a 15% share in the NAND market, good for third-highest, right ahead of Japanese company Kioxia and Sandisk. Micron has 26 long-term memory deals in place covering over 35% of its revenue through 2030.

In Q2, 73% of SK Hynix's revenue came from DRAM and 27% from NAND. That was very similar to Micron, which in fiscal Q4 saw 73% of its revenue come from DRAM and 26% from NAND. Both companies are increasing unit production, but the vast majority of growth is due to higher prices.

Since conventional memory prices have been rising faster than HBM prices, Micron has actually seen faster growth. Last quarter, Micron's revenue skyrocketed 379% year over year, while its gross margins expanded from 44.7% to 86.8%. SK Hynix, on the other hand, saw its revenue soar 257%, and its gross margins rise to 83% from 54%.

Which stock is the better buy?

Both Micron and SK Hynix trade at bargain-basement valuations based on future earnings, as investors fear the end of the memory supercycle. Of the two companies, Micron is more exposed to a drop in conventional memory prices, even with its locked-in long-term commitments, as it derives only a small share of its overall revenue from HBM.

As such, I think that, as the HBM and advanced memory technology leader with strong ties to Nvidia, SK Hynix is ultimately the better memory stock to own over the long term.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.