Key Points
Large language model (LLM) training was the first big phase of artificial intelligence (AI), but the inference market promises to eventually become the larger market. While AI model training is compute-heavy, inference tends to be much more reliant on fast access to memory.
That is one of the reasons why demand for high-bandwidth memory (HBM), a special form of DRAM (dynamic random access memory) packaged with graphics processing units (GPUs) and other AI chips to optimize performance, has been skyrocketing. It is also one of the reasons why Micron Technology (NASDAQ: MU) stock has the potential to double from here.
A cheap stock with big potential
Trading at a forward price-to-earnings (P/E) ratio of just 6.5 times fiscal 2027 analyst estimates, Micron’s stock is far from expensive and has plenty of room to run if the current memory supercycle lasts longer than investors think. That is just what rival SK Hynix predicted, with its CEO saying that 2027 will be the most supply-constrained year the industry has ever seen and that supply will not be able to catch up with demand until 2030 or beyond.
That type of dynamic is not currently priced into the market, and high DRAM prices could be here to stay. The reason for this is quite simple. Demand for HBM is skyrocketing, in large part due to inference, and hyperscalers (owners of large data centers) have shown no signs of slowing their spending on AI infrastructure.
Meanwhile, both HBM and advanced logic chips, like GPUs, need more extreme ultraviolet lithography (EUV) machines to increase capacity. There is only one company in the world that makes these systems, ASML, and it can only produce so many per year.
In addition, HBM can require three times or more wafer capacity than ordinary DRAM. This means that even as DRAM wafer capacity increases, overall supply still isn’t keeping pace. So while the big three DRAM makers are all working to increase capacity, there are built-in constraints that limit their ability to add a large amount of capacity quickly. This should keep DRAM prices high, and DigiTimes has reported that HBM prices could more than double next year.
If DRAM prices remain elevated into 2030 and beyond, it would be easy to see Micron’s stock potentially doubling from here. It has entered into long-term supply agreements for the first time, and these agreements now cover 40% of its revenue. That visibility, along with an extended memory supercycle, should see both earnings continue to rise and its multiple expand. That makes it a top AI stock to consider.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Micron Technology. The Motley Fool has a disclosure policy.
