What Is the Jevons Paradox and What Does It Mean for Micron and Sandisk Investors After Google's Revolutionary AI Breakthrough?

Key Points
Google's memory-compression algorithm caused Micron and Sandisk stocks to plunge.
However, an obscure economics concept suggests it will increase demand for these companies' memory chips.
If history is any indicator, this could be a buying opportunity.
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Last week, Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) Google unveiled TurboQuant, an algorithm that marked a significant advancement in artificial intelligence (AI). Researchers said the algorithm reduces memory usage "by at least 6x and delivers up to 8x speedup, all with zero accuracy loss, redefining AI efficiency." This could reduce the amount of memory needed by as much as 83%.
In the wake of this news, shares of memory chipmakers Micron Technology (NASDAQ: MU) and Sandisk Corporation (NASDAQ: SNDK) fell 10% and 14%, respectively, amid fears that demand for their semiconductors would fall off a cliff thanks to Google's AI breakthrough.
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However, some experts are cautioning that these fears could be overblown, pointing to an obscure economic concept known as the Jevons paradox, which suggests the breakthrough could represent a buying opportunity.
Here's why.
Jevons paradox
In his 1865 tome, The Coal Question, British economist William Stanley Jevons suggested that more efficient use of resources reduces their costs, ultimately increasing demand for them. That's a mouthful, so let's look at a concrete example.
Jevons applied this theory to the increasing efficiency of steam engines, which many feared would reduce the need for, and thus the demand for, coal. What actually happened was more complicated. While the price of the fossil fuel decreased, the falling price actually prompted an uptick in demand.
The Jevons paradox, as his eponymous solution was called, proved to be true, as British coal consumption tripled between 1865 and 1900.
That same logic applies equally well to the current fears about falling demand for the memory chips used for AI.
Google's breakthrough compression algorithm will likely make running large language models (LLMs) more efficient, reducing the need for -- and the price of -- memory chips. Consequently, the falling price of memory chips will likely increase demand for them, fueling greater adoption of AI.
History is rife with examples of the Jevons paradox at work. Increased fuel efficiency in automobiles lowered the cost of driving per mile, encouraging consumers to drive more and boosting fuel demand. There are more examples, but you get the point.
Time to buy?
The initial pullback in Micron and Sandisk stocks telegraphed investor fears that Google's TurboQuant could dent memory sales. But a careful review of the historical parallels suggests this is a buying opportunity.
Don't take my word for it. Just this week, Mizuho analyst Vijay Rakesh reiterated his outperform (buy) ratings on both Micron and Sandisk. He posited that developments like TurboQuant are a positive, as performance improvements will drive further adoption of AI and strengthen demand for key components such as memory chips. He went on to cite -- you guessed it -- the Jevons paradox.
TurboQuant "will enable larger [LLMs], faster inference and better tokenomics, spurring more spending," Rakesh wrote in a note to clients.
Micron stock has gained more than 500% over the past three years (as of this writing). Despite that run, the stock is selling for just 17 times earnings and boasts a price/earnings-to-growth (PEG) ratio of 0.04 -- when any number less than 1 is the standard for an undervalued stock.
Management's Q3 outlook is telling, forecasting revenue of $33.5 billion, which would represent growth of 260% year over year and 40% quarter over quarter. The company is also guiding its gross margin to increase by 660 basis points, from 74.4% to about 81%. That would push adjusted diluted earnings per share to roughly $19.15, a 10-fold increase.
Sandisk was spun off from Western Digital in February 2025 and has since seen its stock price surge 1,850%, yet sells for just 15 times earnings with a PEG ratio of 0.01.
For its upcoming third quarter, Sandisk's forecast calls for revenue of $4.6 billion at the midpoint of its guidance, which would represent 171% growth. Management expects a gross margin of 65.9% at the midpoint, nearly triple last year's 22.5%.
It's possible that those growth targets are ambitious, and the deployment of TurboQuant could dent the price and demand for memory chips. However, history suggests the more likely outcome is that the efficiency gains will be channeled into greater adoption of AI, fueling even greater demand.
There isn't much growth baked into Micron and Sandisk, which suggests they might be a buy at their current prices.
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Danny Vena, CPA has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Micron Technology, and Western Digital. 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.