Key Points

  • Sandisk and Micron have benefited from supply shortages in the memory markets.

  • Lumentum is benefiting from the shift in AI data centers from copper wire to optical networks.

  • 10 stocks we like better than Micron Technology ›

Artificial intelligence (AI) stocks have been leading the market higher over the past year, and some have gone absolutely parabolic with gains of 500% or more. However, that doesn't mean they may not have more upside ahead.

Let's look at three AI stocks with strong momentum.

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1. Sandisk

Up a whopping 2,900% over the past year as of the end of August, Sandisk (NASDAQ: SNDK) shares have been on absolute fire the past 12 months. The company is a pure-play maker of NAND (flash) memory, and it has benefited from a wide supply-demand imbalance that has pushed NAND prices significantly higher. This, in turn, has led Sandisk's revenue to surge and its gross margin to balloon over the past year.

The current supply-demand imbalance stems from a few factors. First, after the NAND market crashed following the pandemic, when there was a lot of pull-forward in demand from electronics and computers, the big three memory makers slashed NAND capacity and directed it more toward DRAM (dynamic random access memory). Since then, these companies have mostly been largely focused on high bandwidth memory (HBM), which gets packaged with AI chips, like graphics processing units (GPUs), to optimize their performance. Soon after NAND capacity was cut, however, demand for massive solid-state drives (SSDs) that use flash memory started to take off to store AI training data.

While historically a highly cyclical business, Sandisk has started to sign long-term agreements. Its first three are worth a minimum of $42 billion, and it says it has five agreements in place for periods of up to five years. The deals cover one-third of its expected fiscal 2027 capacity, and it is looking to push that to over 50%. Meanwhile, the company projected that it could grow revenue in the mid-to-high teens between fiscal 2028 and fiscal 2030 while keeping its adjusted gross margin around 80%.

Despite its huge surge in price, the stock trades at a forward price-to-earnings (P/E) ratio of just 7. If it can sustain solid growth through 2030, the stock could have further upside.

2. Micron

Up nearly 700% over the past year as of the end of August, Micron (NASDAQ: MU) is another memory maker that has seen its stock skyrocket. Micron is one of the big three memory makers, with 76% of its revenue last quarter coming from DRAM and 24% from NAND. The company is seeing similar dynamics as Sandisk, with memory supply-demand imbalances driving revenue growth and gross margin expansion.

The DRAM market is largely being driven by demand for HBM, which is growing in lockstep with demand for AI chips. However, supply remains constrained and looks like it will stay that way in the coming years. One reason for this is that the critical layers of HBM are manufactured using EUV (extreme ultraviolet lithography) machines, which are also used to make logic chips like GPUs. Meanwhile, ASML is the only company in the world that makes these machines, so there is a limit to the number it can make each year. At the same time, HBM requires upward of 3 times the wafer capacity of regular DRAM, which also limits growth and takes away capacity from ordinary DRAM. This has sent all DRAM prices skyrocketing.

Like Sandisk, Micron stock is also cheap, trading at a forward P/E of 6, and it, too, has locked in longer-term contracts. If this supercycle lasts into 2030 and beyond, the stock could have plenty of upside from here.

3. Lumentum

Up 550% over the past year, Lumentum Holdings (NASDAQ: LITE) is benefiting from the shift in AI data centers from copper wire to optical networks. It produces high-power indium phosphide (InP) lasers that convert electricity into light for high-speed data transmission. It is one of the few companies in the world capable of making these lasers in mass quantities, and holds up to a 60% market share for these advanced lasers. The company also has strong positions in the optical circuit switches (OCS) and co-packaged optics (CPO) markets.

Designing and manufacturing InP lasers is extremely difficult and requires specialized semiconductor fabs, as well as overcoming other challenges. Lumentum holds over 1,000 patents, and has decades of manufacturing scale that give it a yield and cost advantage. Meanwhile, once a laser or transceiver component is certified for an AI platform deployment, the risk of it being swapped out for a competitor is low.

With AI data centers just starting to move from copper wire to optical networks, Lumentum is in a strong position and could have nice upside from here.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Lumentum, and Micron Technology. The Motley Fool has a disclosure policy.