Micron Technology stock was gaining on Wednesday as it built on its surge from the previous day. Memory chips are the hottest play on artificial-intelligence hardware.
The stock rose 19% on Tuesday, fueled by a research note from UBS which raised its price target for Micron to $1,625 from $535, arguing long-term supply agreements justified a higher price-to-earnings ratio for the company.
What's good news for Micron is also being taken as good news for SK Hynix, which closed 9.3% higher in local trading on Wednesday, bringing the South Korean firm's market capitalization to 1.599 quadrillion won, equivalent to $1.061 trillion.
Both companies have recorded huge gains and soaring profits over the past 12 months, fueled by AI spending. And there's reason to think the surge can last for a while yet.
Despite its more than eightfold rise over the past year, Micron still looks cheap at less than 10 times forward earnings. That compares with a 22 times forward multiple for Nvidia, and 52 times for Advanced Micro Devices. SK Hynix is even cheaper at around 6.9 times forward earnings, according to FactSet.
"We're not seeing the type of P/E surge you'd expect given the rallies, because earnings are rising faster than the share prices (notably, this is just what we saw with semiconductors starting three years ago)," wrote analysts at Sevens Report in a research note.
American investors could soon have the pick of both companies. SK Hynix has filed an application to list American depositary receipts with the Securities and Exchange Commission. Although the timing isn't confirmed, reports point to a June or July time frame. The size and pricing of the listing haven't been decided, but SK Hynix could raise up to $10 billion according to local Korean media reports.
"While the gains have been extreme in the near term, the reality is they are being fueled by insatiable demand that likely won't end unless the hyperscalers abandon the AI data center buildout (and that's not likely to happen in the next 12-18 months)," wrote the Sevens Report analysts.
The key for continued gains will be spending on AI servers which need high-bandwidth memory, or HBM, to support the processing of huge amounts of data. HBM is a specialized form of dynamic random-access memory, or DRAM, with other variants also required. At the same time, the latest AI servers also require NAND flash memory to store large data sets.
Because HBM is resource-intensive -- each unit needs roughly three times the semiconductor wafer capacity of standard memory -- expanding supply reduces production of other memory types and drives prices higher across the sector.
Micron, SK Hynix and their peer Samsung Electronics are now signing long-term supply agreements with big customers, which could help cement higher margins.
Melius Research analyst Ben Reitzes argues as much as 50% of Micron's new supply could be locked in via longer-term agreements next year.
"Our checks indicate these agreements are gaining ground since memory is 'the biggest bottleneck of all time' in AI. The more you use it, the better AI gets," Reitzes wrote in a research note.