Forget Micron for a Minute: This Memory Competitor Just Crossed a Major Profitability Milestone

With a market cap of over $1 trillion, Micron (NASDAQ: MU) may be the world's largest memory-chip maker, but there are other memory stocks that are also worth a look. One that I'm following is Sandisk (NASDAQ: SNDK), and it just crossed a major profitability milestone in its most recent quarter.

I still think both are worth looking at, but if Sandisk can keep performing at this pace, then it may end up being a better investment than Micron from here.

Image source: Getty Images.

How profitable is Sandisk?

Both of these memory-chip makers are thriving thanks to an unprecedented demand increase from data center operators. Memory is used in multiple locations in artificial intelligence (AI) data centers, whether it's beside computing chips or as long-term data storage. The manufacturers were unprepared for the surge in demand, and now there is a major undersupply, which has caused prices to rise dramatically. This has boosted every memory-chip maker's profit margins, as their input costs didn't change.

Sandisk gave investors some insight into this dynamic during its last quarterly earnings report when it informed investors that two-thirds of its revenue growth came from price increases while only one-third came from increased sales volume. That's an incredible statistic, and it may be a while before it changes.

Micron management told investors during its last earnings report that they expect the tightness in the memory chip market to persist beyond 2027. Chip foundries can't be built and brought online overnight, and even the new supply from the facilities currently under construction may not be enough to satisfy the massive demand that AI businesses are generating. As a result, I think investing in both Micron and Sandisk is pretty safe for the next few years.

The effect the memory shortage is having on Sandisk's profit margins is downright incredible. Look back to the periods slightly over a year ago: Sandisk was either barely breaking even or losing money. Now, it's one of the most profitable companies in the world, delivering a 77% profit margin in its last quarter.

SNDK Profit Margin (Quarterly) data by YCharts.

Consider two major milestones Sandisk recently met: First, it has now been profitable for four quarters in a row. Second, it crossed the 75% profit margin threshold -- something that's rarely done in any industry.

But is it a better investment than Micron?

Sandisk competes with Micron in just one of its two key markets

Micron has grown to become the largest memory-chip manufacturer in part because it produces both NAND and DRAM memory, while Sandisk only produces NAND. NAND is used for long-term data storage and is often used in solid-state drives (SSDs) in data centers. DRAM is often embedded directly on computing units and provides rapid on-demand access to data.

If the memory shortage eases in one of these areas before it eases in the other, one part of Micron's business will still be delivering outsized profits, regardless of which area that is. However, if the NAND shortage is resolved first, then Sandisk's run may be shorter-lived than Micron's.

For the near future, Wall Street expects similar results from both. For Micron's next two quarters, analysts project 349% and 315% growth, respectively. For Sandisk, analysts expect 363% and 306% growth, respectively.

From a valuation perspective, these two trade at nearly the same earnings ratio.

SNDK PE Ratio data by YCharts.

To call one of these stocks a better buy than the other really requires a person to split hairs, but if I had to choose one, I'd still take Micron. While Sandisk has done some impressive things over the past few quarters, Micron is more diversified and can benefit from either a DRAM or a NAND shortage, or both. With Sandisk, once the NAND shortage is solved, shareholders will be in trouble. While Micron won't be as attractive an investment at that point as it is now, it will still be worth owning. As a result, I think Micron is the better bet.

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.