Micron says the AI party is far from over, but not all are celebrating
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CNBC Finance
8 min read
The bears may be ready for bed, but the AI party doesn't look to be ending anytime soon, as evidenced by Micron's quarterly earnings on Wednesday. But which stocks stand to gain the most depends on where they sit in the data center supply chain. Micron delivered a blowout quarter , with sales more than quadrupling to $41.46 billion from $9.3 billion a year ago, and beating analyst estimates of $36 billion. Adjusted earnings of $25.11 per share topped the $20.78 expected from analysts polled by LSEG. And the good times are still rolling. The maker of memory and storage chips is now guiding revenue for the current quarter of about $50 billion, up from just $11.3 billion a year ago, and well ahead of the roughly $43 billion expected by the Street. Positive indicators But it was the earnings conference call that really got investors going. Management got right to the point: supply of memory and flash storage won't catch up with demand for a long while. CEO Sanjay Mehrotra said demand for DRAM and NAND "significantly" exceeds supply and will "beyond calendar 2027 as a result of AI-driven demand across all segments, coupled with structural supply constraints." "Even as we expect industry supply to improve gradually in 2028, we currently do not have a line of sight as to when memory supply will be able to catch up with increasing demand," Mehrotra said, noting that growth in the memory supply is dependent on "greenfield" expansions, or projects that start from scratch, rather than brownfield fabs, which entail modifying or upgrading existing infrastructure. Contributing to Micron's inability to ramp supply to levels that meet demand are long lead times for fab construction, skilled worker shortages, complex regulatory dynamics, and the need for "enhanced energy infrastructure," Mehrotra said. A skilled worker shortage is not an easy bottleneck to address. Management further laid out how the company is shifting from a cyclical commodity business to a contract-driven supplier to the AI boom. Micron has signed 16 long-term agreements with several customers, including hyperscalers, automakers, and AI infrastructure companies, and is locking in sales for three to five years. This transformation is great for Micron shareholders, as it will provide smoother, more predictable sales and earnings, reducing Micron's risk of overinvestment. But it also signals to investors more broadly that Micron's customers agree with the dynamics at play and are willing to sign legally binding multi-year contracts as a result, a signal that should increase confidence in the near- to medium-term sustainability of the AI investment cycle currently driving so much of the market. The report and call propelled Micron shares up 16% on Thursday. But the positive vibes aren't extending to all companies tied to the AI buildout. Not all AI stocks ride along So what does all this mean for investors? It depends largely on where your investments are in the AI infrastructure supply chain. The biggest immediate winners are fellow memory and storage stocks, including SanDisk , Western Digital , and Seagate Technology . Samsung and SK Hynix were also up in Asia overnight, following Micron's results. Companies that are higher up the supply chain â such as suppliers of advanced materials â also benefit, as massive demand for memory chips means Micron has to order a whole lot more stuff to make them. That bodes well for Club holdings Qnity Electronics , which provides materials used in the manufacturing of semiconductors and electronics, and Linde , which supplies rare and noble gases to the industry. Qnity rose 5.4%, while Linde gained 1.62%. It's also welcome news for stocks that help meet data centers' insatiable demand for power. In the portfolio, that means GE Verona , which sells gas turbines; Eaton , which provides electrification and liquid-cooling solutions; and Dover , which also sells liquid-cooling solutions for data centers. Because Corning sells fiber-optic-based connectivity solutions for data centers and doesn't have to purchase memory for its own products, it benefits from the demand for ever-faster, more energy-efficient compute. We trimmed Corning earlier on Thursday, though, because the stock has had a massive move this week . On the flip side, companies that need to buy more memory â think of data center builders like Amazon , Microsoft , Alphabet , and Meta Platforms â are less thrilled by Micron's report. These stocks are out of favor for the moment, no matter how much you argue that the AI spending comes with a positive return on investment (ROI). That's why we're seeing the hyperscale players all down on Thursday, as Micron's results suggest they'll have to keep spending billions of dollars to stay competitive in the AI arms race. Meta has already raised its capital expenditure outlook for this year due to higher component costs, such as memory. Logic chip manufacturers, including Nvidia and Intel , also have to contend with higher memory costs. While their pricing power allows them to pass costs through to protect profits, the memory bottleneck limits upside to estimates, as supply can't meet demand. Higher prices can also lead to some demand destruction and, for some of Nvidia's larger customers, an increased desire to invest in custom silicon that competes with Nvidia's GPUs to run specific workloads more efficiently. That's a key reason for our stake in Broadcom , which supplies those chips. Higher memory costs are also a headwind for Broadcom, but it has a strong AI networking business to help drive revenue growth outside of the custom silicon business. Shares of Broadcom were flat on Thursday. Apple plunge Apple shares slide more than 5% following a round of price hikes on MacBooks and iPads. We knew higher prices were coming, but now we have the official numbers, and they're sizable, likely prompting fears of slowing sales despite the company's more affluent customer base. The iPhone was spared for now but will likely see price increases, at least on some models, later this year when the iPhone 18 is introduced. The Apple pain also likely explains the roughly 3% drop in Arm Holdings . While Arm recently unveiled its own chip, the company's bread and butter is selling IP and then taking either a fixed fee per unit sold or a percentage of the chip's average selling price. As a result, rising memory costs aren't a direct headwind, but they can create pressure if demand destruction is realized further down the chain. For example, if Apple sells a lower quantity of the Arm-based chips to power its products. Also likely factoring into Arm's price action: Rival Qualcomm announced Wednesday it would supply data center CPUs to Meta. While the chip is Arm-based, due to a complex legal history between the two, Qualcomm pays Arm a lower royalty fee than Arm would receive were Meta to buy from another supplier. So, if things are going to stay so great for Micron, does that mean you just get out of the ones Micron sells into? Not so fast. We don't jump in and out of the stocks of great companies, hoping to sell at the tops and buy at the bottoms. That's not our game; we look to buy great names at good prices and stick with them for the long term. In his book "Common Stocks and Uncommon Profits," famed investor Philip Fisher divided growth companies into two categories: those that are "fortunate and able" and those that are "fortunate because they are able." The "fortunate and able" companies are those with strong, capable management that can capitalize on industry tailwinds. The "fortunate because they are able" ones are companies that have both incredible management teams and the financial power and know-how to evolve, adapt, pivot, and innovate to create demand and further growth. Right now, the fortunate-and-able names are winning at the expense of the fortunate because they are able companies. The latter are still incredible companies and are out of favor largely because of their AI spending. But in the long term, they are most likely to come out even stronger. In the meantime, Micron shareholders can keep on partying. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) 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