These Growth Stocks Surged 300% and 1,400% While Everyone Was Watching Nvidia, and They Are Still Cheap. Here's Why.

Key Points
Micron is riding the wave of increasing demand for high-bandwidth memory.
Sandisk is benefiting from supply constraints in the NAND market.
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While Nvidia remains the poster child for the artificial intelligence (AI) infrastructure buildout, it has been far from the best-performing stock in the space over the past year. While Nvidia's stock is up a strong 60% over this period, Micron Technology (NASDAQ: MU) has a 300% gain, and Sandisk (NASDAQ: SNDK) is up nearly 1,400%.
Micron and Sandisk are both riding strong trends in the memory market, although they are involved in different aspects of it. What's even crazier is that even after these huge gains, both Micron and Sandisk still trade at modest forward price-to-earnings (P/E) ratios. Micron trades at a forward P/E of 3.7 times fiscal 2027 (ending August 2027) analysts' earnings estimates, while Sandisk trades at an 8 times multiple for its fiscal 2027 ending in June 2027.
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While both are seeing huge growth and have what appear to be attractive valuations, whether the stocks are good buys at current levels is a bit more complicated. Let's dive in and see how they got here and what's next.
Riding the memory wave
The memory market is broken down into two distinct parts. DRAM (dynamic random access memory) is the memory that translates into computing speed. It's extremely fast but volatile, which means that once power is lost, so is all the data. NAND, or flash memory, is significantly slower than DRAM but is nonvolatile, able to store data over long periods of time.
DRAM is more complex and difficult to manufacture, and as such, three primary companies essentially form an oligopoly in the field: Micron, along with Korean companies Samsung and SK Hynix. These three companies have seen their revenue and gross margins surge over the past year as the DRAM market is currently in short supply.
The reason for this is that in order for graphic processing units (GPUs) and other AI chips to perform optimally, they need to be packaged with a special form of DRAM called high-bandwidth memory (HBM) that lets these chips quickly offload and retrieve data. This is leading to surging demand. Adding to the tightness in the market, HBM can use upwards of three times the wafer capacity of ordinary DRAM. As such, all DRAM prices have skyrocketed.
NAND is also currently in short supply, and prices have also soared. The reasons behind this are a bit different, however. Flash memory saw a surge in demand during the pandemic as consumers ramped up spending on electronics. However, that turned out to be a pull-forward in demand that did not last, and an oversupply of NAND led to prices crashing and gross margins turning negative. This caused the big memory makers to cut flash production and turn more of their focus on DRAM.
However, with the rise of AI data centers, demand for huge solid-state drives (SSD) that use flash memory soon skyrocketed. With capacity cut and demand surging, NAND prices also skyrocketed. This has greatly benefited Sandisk, which is a pure-play NAND maker.
Where do the memory makers go from here?
Why both Micron and Sandisk trade at such low multiples is because the memory markets have historically been very cyclical with big boom-and-bust cycles. As such, investors aren't betting their current earnings power will last. On top of that, announcements around compression algorithms, such as Alphabet's TurboQuant, that could potentially reduce cache memory needs, have hurt the stocks.
However, unlike past cycles, today's memory supercycle is backed by a huge structural growth driver in AI. This is especially true for HBM, which is directly tied to GPU usage. DRAM contracts have historically been less than a year, often a quarter, but the massive need for HBM is starting to lead to long-term contracts of three to five years with minimum commitments. This is a big change to the industry that can help reduce the cyclicality for Micron.
The NAND market, meanwhile, is looking to have its HBM moment with high bandwidth flash (HBF). This is designed specifically for AI inference and bridges the gap between HBM and SSDs. However, it is still very early, and widespread adoption could be years away.
Overall, both Micron and Sandisk need to shed their cyclical labels to move higher from here. In my view, Micron is much closer to this. It's already signed one five-year HBM contract, and if this type of agreement can become the industry standard, it should be able to command a higher multiple. That's why I think it is the better buy of the two.
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Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.