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ARE MEMORY CHIPS STILL CYCLICAL, OR HAS AI CHANGED THE GAME?

In a note Friday, Philip Palumbo, CEO and chief investment officer at Palumbo Wealth Management, highlighted just how much a handful of memory-chip stocks drove the market's gains in the first half of the year.

According to Palumbo, Micron MU.O, Western Digital WDC.O and Sandisk SNDK.O — which together made up less than 1% of the S&P 500 .SPX at the start of this year — accounted for nearly a quarter of the S&P 500’s 8.3% gain in the first half. Their sharp rallies (478% on average over the first six months) made it extraordinarily difficult for investors to outperform, or even keep pace with, the benchmark.

The surge has fueled a key debate: Have memory-chip makers, long viewed as cyclical businesses, become secular growth stories because of AI?

Palumbo says the bullish case rests on three factors: long-term contracts, the high-bandwidth memory (HBM) bottleneck and AI's growing demand for memory.

Historically, memory chips were sold like commodities, with prices fluctuating based on supply and demand. That is beginning to change. Micron, for example, is signing three- to five-year binding contracts with pricing bands and expects up to half of its revenue to come from those agreements.

At the same time, HBM — a critical component for AI workloads — is far more difficult to manufacture than traditional memory, limiting how quickly new capacity can be added. Palumbo notes that Micron and Sandisk have reported being effectively sold out through 2027. With memory emerging as a key AI bottleneck, demand continues to outstrip supply.

Still, Palumbo cautions that favorable conditions rarely last forever. High prices and strong profits attract new capacity and competition, often leading to oversupply.

That distinction matters for investors. Memory stocks currently trade at low P/E multiples, an attractive setup only if they have truly become secular growth companies. Otherwise, they risk becoming value traps at the peak of a cycle. Palumbo's bottom line: long-term contracts support the growth narrative, but memory chips will likely return to their cyclical roots over time.

Meanwhile, to start H2, shares of these three memory makers are down more than 19% on average so far this month.

(Terence Gabriel)

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