History Suggests Micron Stock Will Crash and Take Decades to Recover. Is This Time Different?

Micron Technology (NASDAQ: MU) has become a stock that retail investors love for its strong growth and cheap valuation, while institutional investors have grown increasingly cautious about its outlook. The latest investor to warn about Micron was Cathie Wood of Ark Investment Management, who said that while the current trend is up, memory cycles can be "viscous" and that increased competition from China could eventually upend the market.

If history is any guide, Micron could see its stock crash, and it could take decades to potentially recover.

Before its latest surge, Micron set its all-time high all the way back in the summer of 2000 before the dot-com bubble burst. The company saw soaring revenue and profits driven by a memory shortage that pushed up average selling prices. At the same time, demand for DRAM (dynamic random-access memory) was surging due to a huge PC cycle sparked by the end of Y2K, the internet, and the release of Windows 2000. NAND (flash) memory prices were also soaring due to rising demand for electronic devices and cellphones.

Back in early 2000, Micron's stock went parabolic before eventually crashing back to Earth, and it took roughly two decades for the stock to recover. In the end, it was just another example of the huge boom-and-bust cycles the stock and the industry has gone through over the years.

Micron stock has seen a similar parabolic rise this year, although it makes the 2000 surge look small in comparison. Thus, while the semiconductor stock appears extremely cheap based on near-term earnings, the question is whether this time will be different than memory cycles.

Is this memory cycle different?

Micron is currently one of three big DRAM makers, along with Korean rivals Samsung and SK Hynix. Last quarter, it derived 73% of its revenue from DRAM and 26% from NAND. Together, these three companies control over 85% of the DRAM market.

In addition to the big three DRAM makers, Chinese company CXMT also produces DRAM, as does Taiwanese company Nanya. The NAND market, meanwhile, has more players, including Sandisk, Japanese company Kioxia, and Chinese company YMTC.

The memory cycle is currently being driven by high demand coming from the AI infrastructure build-out. AI chips, such as graphics processing units (GPUs), must be packaged with high bandwidth memory (HBM), a specialized form of DRAM, to reduce latency, while massive solid-state drives (SSDs) are needed to store training data. The big three memory makers, who have put most of their efforts and resources into HBM, have meanwhile caused conventional DRAM and NAND prices to skyrocket.

And this is what ultimately puts Micron and the whole memory trade at risk. While Micron is benefiting from huge HBM demand, conventional memory prices are what are driving the company's colossal revenue growth and gross margin expansion. By my estimate, Micron derives less than 10% of its revenue from HBM (an approximate 20% market share on a projected $54.6 billion market). This makes it very exposed to a pullback in ordinary DRAM and NAND prices.

While booming demand for HBM and memory companies signing longer-term contracts for the first time do make elements of the current memory cycle different than past ones, risks are also on the rise. CXMT has been increasing its DRAM capacity and taking market share, and it recently announced that it is making meaningful progress with more efficient chip designs. While it is very unlikely that any of its chips will be allowed in U.S. data centers, just increasing overall ordinary DRAM supply could have a big impact on conventional memory prices.

If increased DRAM and NAND supply, driven by increased capacity from China, leads to a big drop in conventional memory prices, I'd expect history to largely repeat itself, with Micron's stock crashing and never returning to prior highs. However, I don't think it will crash quite as far as in 2000, and that the company can remain profitable, unlike in past bust cycles. Still, I'd avoid this AI stock for now.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.