Two of the most impressive stocks over the past year have been Micron (MU +0.71%) and Sandisk (SNDK 1.46%). Micron's stock has risen an outstanding 860%, and any investor would be thrilled with a return like that. However, after comparing it to Sandisk's meteoric rise, it looks a bit lacking. Sandisk's stock has risen a jaw-dropping 4,160% over the past year. So, if you had the foresight to invest $10,000 into Sandisk's stock a year ago, that sum is now worth about $425,000.
However, with all of that rise, the word "bubble" is starting to be thrown around more often. This is only natural, as most companies that rise that far that fast are caught up in a bubble. However, after examining a few key parts of each business, I don't think that's the case here. In fact, these two could go even higher over the next few years.
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A memory chip shortage is propelling these two stocks higher
Both Micron and Sandisk make memory chips. There are two primary types of memory chips: DRAM and NAND. DRAM memory can be considered more of the working memory of the device, and is utilized alongside powerful computing chips like GPUs and custom AI chips. It's also the same type of memory utilized in a laptop or phone. NAND memory is a longer-term storage, and is the basis of solid-state drives (SSDs), which are also heavily deployed in data centers. Micron makes DRAM and NAND memory, while Sandisk is only focused on NAND memory. Regardless of which market you're discussing, both companies are seeing a major boom, and both of these components are in short supply.
NASDAQ: SNDK
Key Data Points
When a commodity is in high demand with limited supply, simple economic theory dictates that the price will rise. We're seeing an extreme case of that in the memory world, and that shortage is likely to persist. Micron informed investors during its last call that it could only meet about half to two-thirds of medium-term memory demand. On top of that, Micron expects the addressable market for high-bandwidth memory (HBM, a type of DRAM chip) to soar from $35 billion in 2025 to $100 billion in 2028. That's a major rise, and could signal further shortage in the future.
NASDAQ: MU
Key Data Points
Sandisk is also seeing a fairly tight supply and is seeing strong demand for its core market as well. It projects multiyear data center growth, which will translate into a strong future for it as well.
In their latest quarters, Sandsik reported an impressive 251% year-over-year growth, while Micron's was a tad slower at 196%.
MU Revenue (Quarterly YoY Growth) data by YCharts
These are still incredible growth rates and showcase the soaring demand for their products. But are the stocks in a bubble?
The valuations for each company don't appear to be worrisome
Most of the time, when a stock is in a bubble, it is outrageously valued and easy to pinpoint. That's not the case for these two.
MU PE Ratio (Forward) data by YCharts
Both companies trade for a reasonable forward earnings price tag right now, and if you look at next year's earnings, they look cheap again. That eliminates the valuation concern, but there is the cycle threat as well. The memory chip market is notoriously cyclical, and owning a cyclical stock on the downside of a generational boom isn't going to yield good returns. The question is, how long will this up cycle last? If it lasts for a few more years, then these two stocks could continue rising rapidly. However, once it wraps up, it will be time to sell and move on.
It's anyone's guess as to when that will occur. However, with data center build-outs expected to last for several more years, I still think neither of these stocks is in bubble territory, as they're both putting up great growth at a reasonable to low valuation.
