AI chip mania sows seeds of its own destruction

Subscribe to enjoy similar stories.Investing in artificial intelligence involves a strong belief that it’s different this time, and memory-chip makers are a particularly extreme example.Micron Technology recorded its biggest-ever loss just three years ago, and is now forecast to become the sixth-most profitable U.S. stock. It will make just under $100 billion over the next 12 months, more than Meta or Berkshire Hathaway.

Micron and its rivals are big winners from runaway AI demand and soaring prices for the high-bandwidth memory Micron makes.Like Samsung Electronics and SK Hynix, it’s in the sweet spot of the chip cycle, boosting prices, profits and their stock. It goes outside chips, too: Micron made a notable contribution to Wall Street’s upgrades of the S&P 500 earnings outlook, while the two Korean stocks have made the country’s market by far the world’s best-performing this year.The risk of a downturn is embedded in Micron’s valuation. Two weeks ago it was the S&P’s third-cheapest stock measured by price to forward earnings, and it’s still at under 10 times, tame for a highflying stock.

That doesn’t make it cheap, though. It just means investors recognize that the boom times in memory chips never last.History shows how this works. In the last cycle Micron stock peaked at the start of 2022, with the forward P/E at just nine times, ahead of a halving in the shares that year.

The stock bottomed out and subsequently doubled after the loss was baked into predictions.Something similar happened in the mid-1980s and 1990s cycles. When the stock peaked in 1984—at a level it took another nine years to surpass—it traded at only 15 times forward earnings. In the 2018 cycle the stock peaked at just 5.5 times.