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

The memory chip market has a history of being extremely cyclical. This can make investors unwilling to pay more for stocks like Sandisk (NASDAQ: SNDK) and Micron (NASDAQ: MU) when the companies are doing well, as the threat of the next inevitable downturn always lurks around the corner. This is why the market often undervalues these stocks relative to their tech sector peers in other niches.

However, we've never seen a demand wave for memory like this, and a major change could shift how the industry acts. So, is this time really different?

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Different types of memory have different attributes

There are two primary types of memory chips: DRAM and NAND. NAND flash memory is slower, retains data even without power, and is used mostly for long-term data storage. Both Sandisk and Micron make NAND, which often goes into solid-state drives that are heavily used in data centers.

DRAM can store and transmit data much more rapidly than NAND, but when the power to a DRAM chip is turned off, the data vanishes. This is the type of memory behind the RAM in computers. A subset of DRAM known as high bandwidth memory (HBM) is widely utilized in AI computing devices like GPUs. Micron also makes DRAM. Sandisk does not.

The question of whether "this time is different" for the memory market really depends on which type of memory you're talking about. When it comes to NAND memory, there isn't much to distinguish one product from another. SSDs are really just SSDs, give or take a few feature sets. So, unless some innovative technology is developed, pricing in this sector will largely be dictated by supply and demand.

Fortunately, demand for memory isn't expected to wane for years, as Micron recently told investors that conditions in the memory chip market will be worse in 2027 and 2028 than in 2026. So the NAND market will still be a great place to invest over the next few years.

The DRAM market, especially in HBM, is starting to evolve. Micron recently signed a deal with Nvidia to develop a custom HBM solution for its GPUs. That's a genuinely transformational change in this industry, as there are likely agreements in place between them that will reduce the commodity-like nature of memory chip pricing. Furthermore, Micron has been entering into strategic agreements with many clients that set longer-term floors and ceilings on memory chip prices. Many of those deals run through 2030 and 2031.

Sandisk is also starting to ink such deals. Its "New Business Model" agreements lock clients into committed sales volumes and structured pricing mechanisms. For its upcoming fiscal year, about 50% of its production volume has been contracted for in this manner, and that share rises to two-thirds in 2028. That's a huge shift, and it validates that these two are using this market reset to move away from the volatile pricing that has long been the norm in the memory space.

This is a major step toward reducing the cyclical nature of these two businesses, and as a result, the market may start to value them more like regular big tech stocks rather than as highly cyclical commodity businesses.

Both are cheaply valued

Based on this fiscal year's earnings projections for both stocks, they look cheap.

MU PE Ratio (Forward) data by YCharts.

Most big tech stocks are valued at between 20 and 30 times next year's expected earnings. For these two to reach that range over the next year, they would have to triple or quadruple. It's unclear whether anything like that will happen, but with the cyclical nature of these two companies' businesses starting to fade, I think a repricing of their stocks is in order, making both of them smart buys now.

Keithen Drury has positions in Micron Technology and Nvidia. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.