How Long Will the AI Boom Last? Memory Stocks Offer Clues

How durable do investors think the AI boom is? Memory stocks might provide the best clue available.

Computer-memory manufacturers like Micron Technology, SK Hynix and Sandisk have been on a tear lately, reporting record revenue and profits amid soaring demand for their products in AI data centers.

Demand outstrips the industry’s supply by so much that memory manufacturers have been able to lock customers into long-term contracts, which now account for a huge chunk of their revenue. Micron, for example, which reports quarterly results on Wednesday, in June said it expected half or more of sales to eventually come from long-term supply deals.

As a result, the companies’ near-term growth trajectories are already largely baked into their stock prices. And that leaves movement in their shares more a function of how long investors think computing demand will last.

On that front, confidence in the boom’s staying power seems to be waning. Micron’s shares are trading at about 7 times forward earnings—higher than their low of about 5 times in July but well below a peak of about 12 the previous month. SK Hynix is trading at only around 4 times forward earnings, about half its peak in June.

It isn’t unusual for memory stocks to trade at low multiples at the top of a cycle as investors weigh growing profits against the likelihood of an imminent downturn.

This time, memory executives want investors to believe that the industry has structurally changed and is no longer as cyclical as in the past. They often hold up their long-term contracts as evidence. But persistently low multiples, despite the proliferation of those contracts, show investors aren’t convinced.

“The key question isn’t whether contracts can smooth the cycle, but whether AI investment remains strong enough to sustain it,” Bank of America analyst Vivek Arya wrote in a recent note. “Notably, memory stocks have continued to derate despite rising [long-term contract] adoption, suggesting investors are more concerned about the memory cycle peaking,” he wrote.

Of course, there are still a few company-specific factors that could drive memory makers’ stocks. One is that the companies are building new chip factories that will come online in coming years, which will increase supply. That could be a good thing if demand is strong enough to absorb more chips. Usually, though, more supply in this industry means lower prices and weaker margins.

Another factor for Micron is the removal of restrictions on share buybacks imposed when it was awarded government grants two years ago to fund manufacturing growth. The company plans to eventually return all excess cash to shareholders after the curbs come off in December. That will likely come through buybacks that reduce its share count and support the stock.

Even so, memory stocks remain as good a proxy as there is for investors’ belief in the boom’s staying power. Right now, the conviction isn’t especially strong.

OpenAI says it is scrapping the release of its next-generation AI model over safety concerns that researchers raised during internal testing, one of the clearest signs so far that agent misbehavior could stymie the industry’s rapid progression.

The move follows a summer punctuated by reports of artificial-intelligence systems industrywide going rogue, and marks a rare case of a major AI developer ditching a new release because of safety concerns.

The company had planned to launch the model, known as GPT-6.1 Astra, in the coming days or weeks, aiming for an October debut. OpenAI instead will focus on improving the safety of future models, which it expects to be even more capable.

Amount of construction financing banks provided for Oracle’s “Project Jupiter,” a massive New Mexico data center that is now mired in delays.

Smartphone prices are way up—and are expected to climb further.

The main reason is that AI fever is pushing memory prices higher. Modern phones need a lot of memory, so phone manufacturers have to charge more if they want to keep profit margins healthy. But analysts don’t expect the drift toward higher prices—like the hikes Apple made when it released its new iPhone lineup this month—to be temporary. Instead, the shift is more likely a permanent one where consumers and companies replace devices at a less-frequent rate, but will pay more when they upgrade.

That may be fine for big manufacturers like Apple and Samsung, which can keep growing revenue as long as prices keep going up. The industry has become less hospitable for manufacturers of lower-end phones who don’t have strong-enough margins to absorb the memory-price surge.

AI images are popping up everywhere in food ads—and are grossing people out. Restaurant owners have been attracted by the ease with which they can use AI to create images of sandwiches, fried chicken and salads, among other dishes. But AI’s often imperfect renderings, including bread that “looks like reptile skin” and shrimp that looks like “otherworldly fleshy rings” are often a turnoff.

WSJ AI & Business is a weekly look at AI’s transformation of the business world. This newsletter was curated and edited by Asa Fitch. Reach him at asa.fitch@wsj.com (if you’re reading this in your inbox, you can just hit reply). Got a tip for us? Here’s how to submit.