Profits on the memory market have surged: some chipmakers are reporting gross margins around 80 percent, a level they appear able to sustain for now, according to a Wall Street Journal article published on Wednesday. Rising prices for memory chips and hard drives are contributing to higher retail prices for smartphones, laptops and other technology products.
Why demand exploded
The rapid adoption of artificial intelligence (AI) has materially increased demand for memory. AI development and operation require large volumes of DRAM and NAND memory, substantial hard‑drive capacity, extensive data‑center infrastructure and significant electricity. As a result, demand for products from companies such as Micron Technology and SanDisk has jumped over the past year.
The WSJ notes that SanDisk and Micron currently report gross margins of roughly 80 percent of revenue; historically, margins in the sector rarely exceeded about 60 percent.
Barriers to fast competition
Although high gross margins normally attract competitors, the memory sector’s characteristics limit a rapid expansion of supply. Memory and semiconductor manufacturing are extremely capital‑intensive, and building new production capacity takes a long time. That helps explain why the market conditions generating these elevated profits are unlikely to change quickly.
Spillover to consumer prices
High demand, rising input costs and industry structure have driven up memory prices. Those higher component costs are passing through into end‑product prices for devices such as smartphones, laptops and even some vehicle components. Apple CEO Tim Cook acknowledged in the company’s recent earnings update that memory prices are having an increasing effect on the business.
Counterpoint Research has warned that DRAM and NAND shortages and rising component costs could slow smartphone sales in 2026, because chipmakers are prioritizing supply for AI data centers over consumer devices.
Capex increases and long-term supply contracts
Major tech firms are responding to component‑cost pressures with higher capital spending: Microsoft raised its 2024 capital‑expenditure forecast by $25 billion last week, and Meta Platforms increased planned investment by $10 billion, citing rising parts costs.
Large buyers are also locking in suppliers with long‑term contracts, some lasting up to five years — a sharp turn from the industry’s prior reliance on month‑to‑month agreements. SanDisk said last week it signed new contracts with five major customers that cover more than a third of its manufacturing capacity for the next fiscal year. Western Digital said on its conference call that it has supply agreements extending to 2029.
Stock market effects and risks
The shortage and strong profits have lifted memory makers’ stock prices: SanDisk’s shares trade at nearly seven times their price from six months ago, while Seagate and Western Digital shares have almost tripled over the same period. Micron has risen about 75 percent in the past month and now has a market value exceeding Exxon Mobil.
Such rapid gains increase the risk of a correction given the sector’s historical volatility. Yet sustained demand for AI compute capacity and the long lead times to build data centers may produce business changes that dampen the memory industry’s swings.
Micron and SanDisk currently trade at roughly seven‑ to nine‑times expected earnings for the next four quarters, while FactSet data show that the median forward price‑to‑earnings multiple for stocks in the PHLX Semiconductor Index is about 37x.
Conclusion
AI‑driven demand has sharply raised both memory prices and chipmakers’ profit margins, supporting elevated stock valuations. The capital intensity and slow capacity growth in the industry help maintain these conditions in the near term, but high valuations and the sector’s volatile history mean downside risks remain.
