The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, May 26 (Reuters Breakingviews) - Charles Darwin might be flummoxed by today’s markets. Ordinarily, a sharp memory is a crucial tool for survival: walk into a trap once, and the instinct will be to try and avoid it next time. Indeed, savvy money managers typically internalize old patterns to hang on through booms and busts that thin out the uninformed herds. The investors who just sent chipmaker Micron Technology MU.O to a market value of more than $1 trillion seem to be losing this keenly evolved faculty.

Micron is on an AI-fueled rocket ride, as chatbots’ hunger for data-storing silicon is outstripping supply that is typically fixed over the short run. Fabs for producing chips are running full-out, and prices have risen sharply. It’s a recipe for immediate riches: while the company generated $121 million of free cash flow for the year ending in August 2024, analysts expect $38 billion this fiscal year, according to LSEG data. The amount is expected to double again the following year.

Unsurprisingly, Micron’s stock – along with other giant memory-makers like Samsung Electronics 005930.KS and SK Hynix 000660.KS – has rocketed higher.

Yet good times don’t last forever, especially in an industry like memory, which is historically prone to booms and busts as the market gradually adjusts and new supply slowly comes online or demand flatlines. Micron, for example, lost more than $5 billion in its 2023 fiscal year. Since only the fittest survive, this eventually bred well-attuned investors who awarded lower valuations on a multiple-of-earnings basis during boom times, and higher multiples when conditions were dire.

Micron’s stock trades at about 8 times estimated earnings. The multiple is well below where it was two years ago, when the industry was exiting a period of excess supply. The company’s average valuation over the past 20 years, however, is only 5 times estimated earnings. The gauge still reads hot, even amid a historic and uncertain boom.

There are nevertheless fewer competitors, and producing ever-smaller chips is getting fiendishly difficult. Adding supply is consequently tougher. Yet rising Chinese rivals could upset this balance, just as Korean companies did in the 1990s, when their revenue grew eightfold in four years. More importantly, there should be large doubts about the dubious economics of AI and the demand it’s driving.

For now, none of this seems to matter: Micron’s stock price rose 19% on Tuesday alone. If another lean season arrives, it will be an unpleasantly Darwinian moment for the investing herds.

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CONTEXT NEWS

Micron Technology’s market capitalization surpassed $1 trillion intraday on May 26. The memory-chip maker’s stock has risen nearly seven-fold over two years, and is up 177% since the start of the year.