The Profit Margins for These 3 AI Infrastructure Stocks Are Off the Charts

The artificial intelligence boom sometimes gets a bad rap for fueling pure speculation in companies with weak underlying businesses. But there are plenty of companies making significant profits now due to surging AI-related demand.

Three connected to that space that boast enviable profit margins today are Micron Technology (NASDAQ: MU), Sandisk (NASDAQ: SNDK), and Broadcom (NASDAQ: AVGO). These companies are experiencing booms in their businesses thanks to high demand for AI processors, storage, and memory, coupled with low supply.

And the result is that all of them are enjoying high profit margins that could persist for years.

Image source: Getty Images.

Enviable gross profit margins

Sandisk and Micron provide tech giants like Alphabet, Meta, Amazon, Microsoft, and others with memory and storage components, while Broadcom designs application-specific integrated circuits (ASICs) for many leading tech companies. These components have become integral to AI data centers at a time when technology companies are ramping up their AI spending; the leading hyperscalers plus Tesla plan to lay out a collective $750 billion on AI infrastructure this year alone.

As companies build more AI data centers, supplies of memory, storage, and AI processors have grown tight, allowing the companies that sell them to increase prices and book bigger profits. The result has been exceptional gross margins for Sandisk, Broadcom, and Micron.

Here's what the companies' gross margins were in each of their most recent quarters.

Data sources: Sandisk, Micron, and Broadcom earnings reports.

Margins that high are more commonly achieved by software companies, not hardware companies. But chipmakers and foundries are in the midst of expanding their production capacities in their bids to capture more of the undersupplied market; when those factories eventually come online and the supply-and-demand imbalances even out, these margins could eventually fall. But Sandisk, Broadcom, and Micron are reaping the benefits now by offering some of the most in-demand AI infrastructure components.

Can the good times continue?

The two natural questions investors probably want answered after seeing gross margins this high are why they are so high, and whether they're sustainable. The answer to the first is fairly straightforward, while the second is a little more complicated.

Gross margins for Sandisk, Micron, and Broadcom have spiked as demand for AI memory, storage, and processors has skyrocketed. Consider that one year ago, Micron's gross profit margin was just 37%, and Sandisk's was just 38%.

Alphabet offers a great example of just how intense the AI spending spree is right now. The company plans to spend up to $190 billion this year on artificial intelligence infrastructure, and management says that in 2027, spending will "significantly increase compared to 2026."

So, are these margins sustainable? Not exactly. The markets for these components are inherently cyclical (particularly for the memory chips made by Sandisk and Micron). New products and services debut (in this case, AI data centers powered by advanced AI models) and spur surges in demand. Production capacity gets added, and supply rises. Then demand tends to slacken, and the market dynamic reverses.

Eventually, AI data center infrastructure investments will cool -- nothing lasts forever. What's difficult to predict is just how long demand will stay elevated. At this point, though, there's no slowdown in sight. AI spending is still increasing, and even when it cools a bit, there will still be much more need for AI components than there was in the recent past.

Owning some AI infrastructure stocks is probably a good idea

With the caveat that these companies have histories of boom-and-bust cycles, it's probably a good idea to have a little bit of exposure to them in your portfolio.

Micron's shares actually look like a pretty good deal right now. They are trading at a price-to-earnings (P/E) ratio of around 35 right now, compared to the average P/E ratio for the tech sector of about 37. Broadcom and Sandisk are pricier, with ratios of 83 and 53, respectively.

That doesn't mean they're not worth buying amid surging AI demand, but investors should recognize that if they buy now, they're paying a premium.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Broadcom, Meta Platforms, Micron Technology, Microsoft, and Tesla. The Motley Fool has a disclosure policy.