Is the Breathtaking Runup in Memory Stocks Driven by Short-Term Thinking?

On the June 22 episode of The Morning Filter podcast, host Susan Dziubinski sits down with Morningstar senior technology stock analyst William Kerwin at the Morningstar Investment Conference to discuss Apple AAPL stock, what’s next for artificial intelligence, and where the market looks bubbly. Here are a few excerpts from the episode.

Morningstar’s Approach to Valuing AI Stocks

Susan Dziubinski: Would you say that Morningstar, are we, is more conservative than the street when it comes to valuing AI stocks?

Will Kerwin: I wouldn’t say we’re more conservative. I think the core tenet of Morningstar is being long-term-focused. What I’ve seen in the AI trade is probably a lot more speculation versus investment, in terms of short-termism and chasing stocks up over their prospects in a given year or in a given quarter. That is just not a game that we’re going to play. We’re going to try to tell our clients what a fair price is for this stock to be a long-term holder of the stock. I think of memory stocks, for example, where in the short term, they are absolutely ballooning, prices are going through the roof, they’re supply-constrained. We may talk about those a little bit more later, but we think that’s a short-term dynamic. That’s not a stock that we like to hold and close your eyes for the next five years and come out on the other side. And so, maybe we look more conservative on those, but I still wouldn’t call it conservatism. I would say having a kind of wider angle and a longer-term view.

Why There May Be Limits on Memory Stocks’ Success

Dziubinski: Now, let’s close with: What are some of the stocks on your list that maybe Dave would call kind of “bubbly,” which means the market’s ahead of itself in your opinion on them?

Kerwin: We have to end on a negative note, I guess. I mentioned memory earlier, so I may have stolen the lead, but I think memory is a classic example of a stock that is not for Morningstar-type investors. In terms of long-term, high-quality, positive fundamentals, those are not the characteristics that we see in memory stocks. Now, the performance in the short term has been nothing short of breathtaking. We are seeing a supply-constrained market for a commodity chip. These memory chips are fungible in our view, whether you’re getting them from SanDisk SNDK, from Micron MU, from Samsung, from SK Hynix HXSCL, they can all do the same thing. When you have a supply-constrained market, we come back to Econ 101, you reach a market-clearing price, and these prices have just been going through the roof because demand is high, and they can’t build out new supply quickly enough.

Now, that’s generating immense growth, huge profit margins for these companies, but we think this is finite. We think it is part of a cycle. There are some bulls in the market that are saying that AI is kind of the end of cycles in the memory market. We disagree. What I’ve been calling this is really a particularly strong and particularly durable upcycle, but a cycle all the same. What I look to is this whole host of six memory makers primarily in the market, building out a whole, large amount of new supply in late 2027 and 2028. We think that’s going to apply some downward pressure on these lofty prices and bring these results back down to earth a little bit, and likely, in my view, also the stock prices.

Subscribe to The Morning Filter on Apple Podcasts, or wherever you get your podcasts, and keep up with the latest research from hosts Susan Dziubinski and David Sekera on Morningstar.com.