Micron's AI Memory Chip Business Is Booming

Key Points

• Micron reported strong results as demand for high-bandwidth memory (HBM) chips explodes.

• DRAM pricing is also strong as manufacturers prioritize HBM chips destined for AI accelerators.

• Investors should remember that the memory chip industry is cyclical, and that periods of hefty profits have never lasted indefinitely.

• 10 stocks we like better than Micron Technology ›

Memory chip manufacturer Micron (NASDAQ: MU) was slow to embrace the high-bandwidth memory (HBM) chip market. HBM is critical for artificial intelligence accelerators, providing the massive bandwidth necessary to run AI workloads effectively. In the early days of the AI boom, Micron was largely missing in action.

That situation has now changed dramatically. Micron has successfully ramped up production of HBM chips and is pushing ahead with development of its next-generation HBM4. As manufacturers prioritize HBM, demand is outstripping supply for standard DRAM chips, leading to strong pricing. These two factors have led to blockbuster results for Micron.

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The mother of all up cycles

The memory chip market is cyclical, owing to the commodity nature of memory chips. It's possible that the current up cycle would have already ended if not for the AI boom. Demand for PCs and smartphones isn't particularly strong, with both markets weakening considerably following pandemic-era booms.

But AI has turned everything on its head. Manufacturers are racing to increase the supply of HBM as hundred-billion-dollar AI infrastructure deals are thrown around like candy. This prioritization of HBM over standard DRAM is pressuring DRAM supply, pushing up prices. Not only is Micron selling massive quantities of high-priced HBM chips, but it's benefiting from rising DRAM pricing as well.

Micron's total revenue in the fourth quarter of fiscal 2205 was $11.3 billion, up 46% year over year. About four-fifths of that total came from DRAM, which includes HBM. Revenue from HBM alone was nearly $2 billion in the quarter, putting HBM revenue at an $8 billion annual revenue run rate. It wasn't long ago that Micron's HBM revenue rounded down to zero, so this is quite an accomplishment.

For standard DRAM, Micron expects to grow its bit supply for calendar 2025 at a lower rate than industry bit demand. Combined with improving demand and constrained supply growth from other suppliers, the company expects DRAM supply growth to remain muted going into 2026, which should put upward pressure on pricing.

Micron's profit margins are exploding under these conditions. Adjusted gross margin was 46% in the fourth quarter, and adjusted operating margin was 35%. Both metrics were up significantly year over year. For the first quarter of fiscal 2026, Micron sees adjusted gross margin expanded to a range of 50.5% to 52.5%. Historically, it's been rare for Micron's GAAP gross margin to exceed 40%. GAAP gross margin was only slightly lower than non-GAAP gross margin in the fourth quarter, easily topping that level.

What could go wrong?

As long as demand for AI infrastructure, and in turn demand for HBM, continues to boom, Micron will be sitting pretty.

Major AI infrastructure deals are popping up seemingly every day. OpenAI reportedly agreed to pay Oracle $300 billion over five years for AI infrastructure, then took a $100 billion investment over time from GPU giant Nvidia to fund AI infrastructure investments. Other tech giants, including Microsoft and Meta, are also pouring unprecedented amounts of capital into AI data centers.

For the time being, demand for HBM looks likely to accelerate as these AI infrastructure investments play out. However, it's not hard to see where all this might be heading. These investments are based on assumptions about future demand for AI computing, as well as future capabilities of AI models and agents. If that demand doesn't materialize or comes up short of expectations, one eventual consequence would be a vast oversupply of HBM chips.

Under this scenario, the extremely strong up cycle Micron currently finds itself in would give way to a potentially brutal down cycle. Micron has reported negative gross margins during the worst down cycles of the past as prices fell off a cliff. The next down cycle could be just as bad.

Of course, it's impossible to predict anything about the AI industry multiple years into the future. However, investors thinking about buying Micron stock should remember that memory chip up cycles have never lasted forever.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.