Memory stocks are back on the upswing, and Morgan Stanley analysts say their recent breather was necessary to support more explosive gains.
While Micron's stock rose 11.7% on Thursday, it's off nearly 10% from its peak close on June 3. Shares of South Korea-listed memory-chip makers Samsung Electronics and SK Hynix are down 18% and 13%, respectively, from their recent closing highs.
Investors have grown concerned about the durability of the memory-cycle boom, but Morgan Stanley analyst Shawn Kim noted that dynamic random-access memory remains a key bottleneck to the artificial-intelligence build-out. SK Hynix, Samsung and Micron are the world's top DRAM producers and have plenty of room to keep capitalizing, he noted.
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"The cycle is still accelerating, earnings revisions remain robust and more sustainable than most believe," Kim said in a Wednesday note.
A correction among memory stocks that have had strong run-ups so far this year "was inevitable and ultimately healthy if this memory bull market is going to extend" through the end of the year, he said.
In his view, price resets don't indicate the end of the cycle, but rather a necessity to elongate the boom. Wall Street's upward revisions to earnings estimates "justify the rally" over a longer horizon, Kim said, and the long-term agreements between memory-chip suppliers and customers could lead to reratings of the stocks.
If the current DRAM cycle were to follow precedent, it "should be near peak cycle" at the end of the year, Kim said. But demand driven by the rise of agentic AI makes it likely that the top is still several quarters away, he said.
For memory stocks to fetch higher valuation multiples, the companies need to maintain supply discipline and "demand must convert into durable economics" over the long run, he added. Previous memory cycles were always driven by supply rather than demand, which led to an eventual product glut, Kim said.
Wolfe Research analyst Chris Caso also sees the prospect of "better multiples" as long-term customer agreements mean supply expansions would be supported by "real forecasts." Long-term agreements are new to the memory industry, meaning they may not be fully reflected in investor expectations.
Micron shares trade at a forward multiple of 9.4 times estimated earnings, ranking in the cheapest decile of the S&P 500, according to Dow Jones Market Data.
Meanwhile, memory chip makers have benefited from supply shortages that have allowed them to raise prices, but Kim expects memory prices to eventually decline as deployments kick off later next year.
That's not necessarily bad for the memory companies, however. Lower prices for DRAM could make it cheaper to run AI models, thereby making deployments less expensive and potentially driving even more AI demand, Kim said.
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Wolfe's Caso is modeling for DRAM prices to jump 200% this year, and 17.5% next year. Bit shipments, which are how memory production is measured, will likely be limited through next year, Caso said in a Thursday note, pointing to a shortage of cleanroom space where chips are manufactured.
Memory prices have almost doubled since February while lead times have expanded, Morgan Stanley's Kim noted, pointing to long-term agreements that have locked up supply.
