Memory Stock: Value Trap or Still a Big Opportunity?

Memory stocks are the talk of the market, but are these stocks values today or is it a value trap for investors? I want to discuss that with Neil. Neil, you cover this closely at a very high level. Is this a value or value trap? >> Well, that's the trillion dollar question. >> Multi-trillion dollar question. Yeah. Trillion dollars for each company at this point. >> Micron is worth just over a trillion dollars. Let's let's talk about what uh where where we've come in the past year and maybe where we're going in the future because I think what is confusing look at at a lot of these companies is like Micron 6.6 times forward earnings estimates and it's hard to argue with their revenue growth. Their margins are incredible. Uh what has driven that growth over the past year and then we'll get to maybe what happens next in just a moment. So it's in in simple terms it is there is just too much demand for what they make and there is not enough supply and so they can charge more people companies are willing to pay more because they need it as soon as possible. So they enjoy they enjoy the the the premium that all of these companies like all of the hyperscalers all hyperscalers the the Nvidas everybody's paying a premium right now for high bandwidth memory which is something that Micron Samsung and SK Hindings are selling and that is why a a micron is now worth over a trillion. I believe SK Hindings is also worth over a trillion dollars. Micron is up 10x or so over the past year and a half. We've seen uh SanDisk, although SanDisk is not really in the high band mid high bandwidth memory game, but the stock there is also more actually 30x I think. >> Well, and that's that's worth touching on because it does bleed into the HBM memory does bleed into uh the more traditional RAM products that you would have like in your iPhone for example because the wafers of those products essentially go into high-end with memory. So you're you're stacking that high band bandwidth memory so it makes it faster but you're t you're then taking supply away from iPhones for example and putting them into Nvidia chips and that's something that even Apple has had to deal with. And I think it's so interesting that Apple as brilliant as Tim Cook has been from a supply chain perspective didn't see this coming. And the irony there is the iPod was actually created in the last major crash of memory because memory was essentially they were giving it away after the the 2000 the dot crash and Apple said you know what we're going to buy all of this supply and we're going to make this little music product and they had basically a monopoly on the market because they had all the supply after the last crash and they didn't see this boom coming ahead of time. Yeah, and I think that's also why Micron has shifted away from from that side of the business and really focused only on HBM because that's where the money is at for them. But clearly the money is at the other side for for a company like SanDisk. So we are now in in a place where there is just enough too much demand, not enough supply. Supply is coming online. Supply is coming online more and more. We're expecting way more in in mid 2027 and onwards. But the demand just exceeds supply by by a factor of uh I don't know some people say 5 to1 sorry 3:1 really depends on where where you're looking but that's why that's why Micron now has gross margins of 85%. That's why it's extremely profitable today and that's also why the the forward PE sits at 6.6 six times and even the trailing sits at 21 times. But for a company that is growing this quickly, it's on paper pricing wise, it is extremely extremely cheap. Why? The question now is why is it only trading at 6.6 times forward earnings? >> All right, so let's answer that that because the the supply this is a challenge, but when there's this much profit to be had and there is not one player, it is not a monopoly. It is an oligopoly at at best. And if you want to include, you know, SanDisk, if you want to include some of the Chinese suppliers that are coming online, not necessarily bringing HBM, at least the the most advanced HBM, but bringing some of the DRAM products uh into the market. This is there is six, seven, eight players that you want to keep an eye on and they're all seeing all of these profits and going, you know what, we want a little bit more of that. So they are upping the capex and that's a piece of this is that more supply is coming to the market. >> Yes, more supply is coming to the market but based on comments from all of these companies and even from the customers of these companies they are not seeing the end of of the tunnel just yet. Even with all of that supply coming online, it I don't know how long this will last, but I don't see things changing that much in 2027 based on on the comments that we're seeing across the board uh today. And honestly, from a consumer standpoint, if I don't know if if people know, but there is a new Google Pixel Pro that came out and you can see there is a memory issue there as well because there's no 129 or 28 uh gigs option anymore. you have to go straight to the the level above it because it's just not worth it uh for them. So that the price has increased and now there's no lower level option either there. We've seen that I think with uh Apple's products as well. They're increasing the the prices. So it's it's a problem these big companies want to solve as soon as possible. Unfortunately, it's just a demand and supply issue right now. But I do think all of these big tech companies and especially the chip makers, they are looking at various ways to optimize for memory. They're looking at various ways to make sure that they use memory as efficiently as possible to make sure that the total cost of ownership makes sense and to make sure that well they just don't keep paying those super high premiums because if they can they can send the message to these memory makers that look we are going to find ways to make sure that memory prices are going to come down because we it doesn't work like we we are not going to see you have 85% % gross margins for another 10 years or so. So either increase supply way more or drop down drop down your prices. Yeah. And that is the the challenge of what happens not necessarily in 2027 but 2028 2029 is really what I think investors are thinking about today. And just to put some historical context to this Micron in particular has been through this in the past. Uh we were talking before we started recording. If you would have bought shares of Micron even in 1999, much less at the peak in 2000, you would have even if you held it for a decade, would have lost about 80% of your money because what typically happens in these markets and these are these are commodity markets. And the reason they're called commodity markets is if you need some RAM or if you need HBM, you can go to Micron, you can go to SK SKH, you can go to Samsung and it's a replaceable product. It isn't just it isn't like an Intel chip where it was a big deal when when Apple moved from Intel chips to making their own chips. You have to comp design a completely different chip. It is it is has to be plugandplay. And that means that when there's more demand than supply, prices go up. But when there's more supply than demand, and this is the problem the industry has always had, then those prices start to plummet. And Micron throughout its history could go 2008 negative gross margins, not even operating margins, gross margins were negative in 2008. Same thing in 2009. You know that their gross margins were even negative in 2023, fiscal 2023. So we go through these cycles periodically. And this is just the most exaggerated I've I've ever seen. Um, you know, I I wasn't following the memory space back in the late 90s. Um, but 76 73% gross margin on a trailing 12-month basis is even higher than that if you just look on on the quarterly numbers. But that probably is not sustainable. The question is where is that sustainable number? When do we get to the point where some of this new capacity starts to come online and Micron's building it, Samsung's building it, SKHEX is building it, you know, uh, they're some of them are buying back shares as well. Um, so how do you think about that with shares like this? Is does that worry you that this is a value trap that yes, it's trading for 6.6 times earnings today, but in the future if those margins go from 85% to 60%, heaven forbid 30% like they've been historically, this is not only going to be a more expensive stock, it could potentially be a very expensive stock because now your profitability just absolutely plummets. Yeah. So, a couple of things. Micron, they're not allowed to buy back their shares right now. They could start to buy back their shares again later this year in December due to federal grant restrictions. So, for now, what we see is just free cash flow increases. And this is one of the I'd say bullish cases. Although I don't really rely on the share buybacks as a pure bull thesis, but I do I do think these are companies that will buy an insane amount of shares over the next couple of quarters when they can. It's quite interesting that all of these well interesting or funny, but these memory makers generate more free cash flow than than the big tech companies. Like if you do the combined number right now of course because the other are are spending a lot but it's >> it's a good place to be actually yes if margins will peak in the next let's say 12 to 18 months or so let's say 12 months margins can peak but I still think they can grow revenue substantially which means still more dollars flowing flowing to the bottom line and uh famous last words but it is a bit different this time purely because the amount of money that they're generating right now is just substantially larger than any other peak of of previous cycles. Like it's it it is just insane how much money they're making today, which again is is maybe part of the problem in the industry, but it it is a good problem to have for them right now cuz they can generate tens of billions of dollars in free cash flow. Yes, supply will go online more and more in 2027, but I do still think that the dollar amount can continue to grow a lot over the foreseeable future. And if margins drop from 85% to 80% or even if it just goes to 75%, I I still think those are going to be great businesses and very very profitable as well. I could be very wrong, but for now it is trending that direction. I I don't doubt at all that the operations of these businesses are going to be phenomenal probably close to through the end of the decade. What what I would say and the reason that I'm going to make the argument this is a value trap is we see this over and over and over again in technology and in commodities where you get a ton of demand and you touched on it. There's there's both supply and demand that is going to be impacted over the next year or two. uh on the demand side these companies the the companies buying memory have not had to optimize for memory in the past and we've seen just like these you know it's these papers that I don't understand but you know Alphabet releases a paper and says hey now we're going to be 10 times more efficient with our memory well they didn't need to do that research previously because memory was not free but it was not the number one item in the bill of materials that they had to worry about now it is probably the number one thing they need to worry about whether you're Alphabet, whether you're Amazon designing their tranium chips, whether you're Apple, you know, designing iPhones, this is something that you're really thinking about. So that's going to affect the demand side. On the supply side, these companies always overshoot supply. And the reason is there's no control there. There's nobody there's no mafia that sits in a room. There's no OPEC saying, you know what, we if if we increase supply by 20%, that's going to still keep us at a really good margin. So, let's just do that and let's let's make sure we don't overbuild. They always end up overbuilding. And the the wild card here that I don't think that we fully understand exactly what they're doing and how much they're going to grow is some of these Chinese suppliers. Because some of those Chinese suppliers can't currently supply Apple, for example, with products, but they can absolutely supply Chinese companies who could then potentially take market share because they can potentially have lower prices. Maybe then we get some of those restrictions taken off and they can supply Apple with memory products and now suddenly if you're Micron, you've given up that lower end of the market, the DRAM market to focus on HBM and now you don't have the same diversity of the business that you once do and you're in the same situation that you were in before, but now you've lost out on DRAM because a lowcost supplier is coming to the market from China. And this is something that just happens over and over again is when China gets into these manufacturing businesses, it just really worries me as an investor. Uh, and we're not there yet where they're the big name that you want to worry about. But we've seen this, we've seen this happen over and over again. We've seen it in wind turbines. Uh, we've seen it in, you know, everything in manufacturing. When they decide to go after something, they make really good products. They make them at a very low cost. Electric vehicles is another perfect example of that. If there was a free market for electric vehicles, we would all be driving Chinese vehicles. They they're essentially I mean there tariffs so high we basically can't even have them in the US. But I know in Europe they've become extremely popular because they are very low cost and very high quality. So uh that's the thing that I think is coming down the pipeline and we're not going to see it in the numbers this year. We're not going to see it probably in the numbers next year, but that's on the horizon. And that's the big thing that I think investors need to think about. So that's why I would make the argument that this this is probably a trap. I just don't know where when that's going to be realized by the market. >> Solar panels are are another example. >> Solar panels is another perfect example. Yeah. >> Yeah. Um but yeah, I I the thing here is I own Micron. I've owned it since $90 or so. But the position that I have right now is is as they call it house money because I've taken profits along. I mean it's up more than 10%. So obviously I I did the thing with micron is it can go it can go much higher because the the company just performs but headlines like what you've discussed right now right if suddenly these companies can buy from Chinese suppliers the headline will hurt these memory names significantly even if we will see no effect on the business for the next I don't know 12 months 18 months or so the pure headline will just put the stock under pressure and we've seen happened time and time again. There is a headline with regards to memory. These names are down like these names are still down 30 40% or so from their highs from what is it a month and a half or so ago. >> Yeah. Yeah. No, it it will be it's going to be a volatile space. Uh Micron is down 20% 21% uh from its from its peak as we're recording right now. But like I mentioned, you know, uh you can look back to 2000. uh stock peaked July of 2000 and it did not return to that level until I believe it was 2024. Uh so it took almost a quarter of a decade to return to that level and the peak draw down was 98% over that period of time. So that's what can happen in commodity markets if we go from an under supplied business which memory was in the late 90s and early 2000s to a very overs supplied business which it became in the early 2000s. these companies get into a lot of trouble really quickly. Uh, and that can that can turn really quickly. And by the way, investors are the stock's going to fall before you see it in the financials. That's the other thing I I just want to remind investors is that you're not going to see Micron say, you know what, our margins were down this quarter. Investors are going to see that ahead of time. You know, I'm tracking I'm trying to track the real-time pricing and we saw the real-time pricing on a lot of these products peaked in May. Um, it's not it's not going it depends on the specific piece of memory that you're looking at, but a lot of these products peaked in May. Price does impact demand. You know, you raise the price of of an iPhone $300. There are going to just be fewer people that are going to buy them. Uh, so that will eventually make its way to the market. But let us know what you think about memory stocks today. Are these a value or a value trap? Leave your comments in the comments section below. Don't forget to subscribe to the Mly Fools channel here on YouTube. Thanks for watching everybody. See you here next time.