The market’s short memory

AI-driven memory scarcity is generating exceptional profits for Micron, but history suggests that new supply will eventually erode its pricing power, making Arm and KLA more durable long-term semiconductor exposures.

• Micron’s market value passed $1 trillion in late May after its shares rose roughly 700% in a year; quarterly revenue reached $41.5bn, up 346% year over year from $9.3bn, while gross margin reached 85%.
• HBM is more complex than conventional DRAM, requires advanced packaging and is increasingly sold through multi-year contracts, which could reduce earnings volatility, but its growth has so far been driven mainly by higher prices and a favourable product mix rather than much higher shipment volumes.
• In 1996, Micron shipped 77% more memory bits, yet revenue per bit fell roughly 45% when supply overtook demand, leaving total memory revenue slightly lower.
• In 2018, DRAM volumes rose about 20% and prices about 35%; by 2019, excess customer inventories and improved manufacturing drove DRAM prices down about 30% and sharply reduced Micron’s revenue and profitability.
• In 2023, DRAM prices had fallen almost 50% and NAND prices more than 50%, turning gross margins negative; new capacity from Micron, Samsung and SK Hynix could begin affecting supply around 2027–29, although the timing remains uncertain.

Takeaway: The AI memory boom may last longer and HBM may be more differentiated, but investors should focus on businesses whose pricing power does not depend on scarcity; Baillie Gifford therefore prefers Arm, supported by architecture adoption, and KLA, supported by rising chip-manufacturing complexity, over Micron’s more cyclical economics.