Some Investors Are Panicking About Memory Stocks. Micron Shareholders Should Keep a Cool Head.

Shares of chipmaker SK Hynix (NASDAQ: SKHY) plunged after the company reported second-quarter results that fell short of the near-impossible expectations set by investors and analysts.

The company's sales surged 257% to $54.5 billion, and operating profit skyrocketed 557% to $41.7 billion. Wall Street's average estimate anticipated more.

SK Hynix shares plummeted on the news, and they grabbed fellow chipmaker Micron Technology (NASDAQ: MU) on its way down, pulling Micron stock lower.

Micron's shares were already sliding in the weeks leading up to the recent decline, but the latest tumble has some investors acting as if the memory chip boom is over.

Here's why they're wrong and why Micron shareholders should stay the course (or buy more).

Image source: The Motley Fool.

1. Micron's sales and earnings are surging

Micron reported its latest quarterly results on June 25, and by all accounts, it was a huge success. Micron's revenue skyrocketed 345% in the fiscal third quarter (ended May 28) to $41.5 billion, a company record. That was good enough to easily beat analysts' average estimate of $35.8 billion.

The company's earnings were even more impressive, with earnings per share rising more than 1,200% to $25.11, again outpacing Wall Street's estimates.

Tech companies running artificial intelligence (AI) models can't get enough memory these days, and the rising demand has led to rapid margin expansion at Micron. Gross margin was 83% in the quarter -- up from just 58% in the year-ago quarter.

This isn't breaking news. But attention spans are short these days, and investors need to be reminded about the blockbuster quarter Micron reported just a month ago.

2. Micron's large, long-term contracts are a huge indicator of demand

Micron has 16 strategic customer agreements (SCAs), which are long-term contracts that run through 2030. That's a big deal for Micron because memory demand has historically been highly cyclical.

But these long-term contracts show a shift in the memory market, and management said on the earnings call that these agreements will "significantly enhance the durability and predictability of Micron's strong financial performance."

What's more, they're highly lucrative. Fourteen of the 16 signed SCAs have a cumulative minimum revenue (referred to as remaining performance obligations, or RPOs) of about $100 billion over the rest of their terms.

And because the contracts are calculated using baseline memory prices, management said they will actually end up being much higher and will "well exceed" $100 billion.

3. The memory market continues expanding

I understand that some investors are wondering when an AI infrastructure slowdown is coming. But there isn't evidence of that yet, and memory demand continues to be strong. Micron Chief Executive Officer Sanjay Mehrotra said on the earnings call, "We expect tight conditions to persist beyond calendar 2027 as a result of AI-driven demand across all segments coupled with structural supply constraints."

And that could be conservative. SK Hynix's management expects a shortage through 2030. And consider that Apple just raised prices across nearly all of its devices -- a big move for the company -- and it cited high memory costs as the reason for doing so. Apple likely wouldn't have made that decision if it didn't expect memory prices to remain elevated.

Stay the course or pick up some Micron shares at a discount

Micron's shares are down about 30% during the past month, as of this writing. Given everything I've mentioned above, I think some investors have been overreacting to Micron's memory peer missing revenue and earnings estimates.

Instead, they should be staying the course with Micron. And with its recent pullback, it's probably not a bad idea to add your position.

Micron stock has a trailing price-to-earnings (P/E) ratio of less than 17, far below the tech sector average P/E ratio of 39. Which makes now a great time to buy Micron stock if you've been waiting for a chance to own shares of a leading memory chip company.

Chris Neiger has positions in Apple. The Motley Fool has positions in and recommends Apple and Micron Technology. The Motley Fool has a disclosure policy.