These 2 Hardware Leaders Will Cash In on the Next Data Center Memory Crunch

Key Points

• Sandisk and Micron are primed to cash in on a generational demand shift.
• Both stocks are cheap and will provide monster returns during the next few years.
• 10 stocks we like better than Sandisk ›

The supply crunch in the memory chip industry is becoming quite annoying. Whether you're a consumer looking to buy a new laptop or phone, or a business that wants to obtain cloud computing hardware, it has caused prices on these units to skyrocket. In fact, one of the artificial intelligence (AI) hyperscalers, Amazon (NASDAQ: AMZN), bumped its capital expenditures from $200 billion to $220 billion solely based on higher memory prices. That's not an insignificant increase, and there are only a handful of companies that actually benefit from soaring memory chip prices.

I don't think we're out of the woods yet in terms of memory chip availability, and Sandisk (NASDAQ: SNDK) and Micron (NASDAQ: MU) are primed to benefit as a result. Despite these two having a great start to the year, I still think they're incredible buys right now, as it will be some time before these stocks take a hit due to the cyclical nature of the business.

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Why is the memory chip industry cyclical?

Nearly all industries have some level of cyclicality, but some of them fluctuate more than others. Demand curves may rise and fall, but how scarce or unique the product is can dictate if it's affected by the rise and fall of demand and supply. In the memory chip industry, there isn't a lot that separates one memory chip from another. This causes its clients to swap out memory components based on who has the best availability or price, which gives suppliers like Micron and Sandisk almost no bargaining power.

So, memory chip prices end up closely linked to supply and demand. Fortunately for these two, the demand for memory chips right now is unprecedented due to the sheer amount of money being spent on the AI build-out. This has consumed nearly all available production capacity, leading to soaring chip prices. In fact, Sandisk informed investors during its most recent earnings announcement that two-thirds of its revenue increase came from rising prices, while a third came from increased output. That's an unbelievable stat, and until demand falls or production rises, this mechanism will stay in place, and we may not have seen the last of soaring prices.

The notion of demand falling is highly unlikely, as AI hyperscalers project they will spend more in 2027 than they did in 2026. Nvidia (NASDAQ: NVDA), a huge buyer of memory chips, projects the top five AI hyperscalers will increase their spending from $800 billion in 2026 to $1.3 trillion in 2027. It's a race to build out the most computing capacity available, and that won't stop for several years.

So, the only way this problem is being alleviated is through increased supply, which Micron and Sandisk are working toward. Micron plans to have new production facilities up and running by mid-2027 and in 2028. Sandisk and a partner are planning to spend more than $32 billion through 2032 to expand production.

It remains to be seen if these increases make a difference, but with AI demand expected to last for several years, it's likely that memory chip prices will remain elevated for some time, which bodes well for both stocks.

Micron and Sandisk are dirt cheap

Because the market will always be fearful of a cyclical drop in these two, it will won't give them any sort of premium valuation. It will take each company quarter by quarter, and both companies trade at a reasonable trailing price-to-earnings (P/E) ratio.

However, if forward earnings projections are used, both stocks look cheap.

If both stocks can deliver on expectations and have their valuations rise to the 20 times trailing earnings price target they're at now, that could lead to both stocks tripling, making them no-brainer buys. We'll see how the market reacts during the next few years, but with AI demand not letting up, I think both stocks are primed to cash in.

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