‘You don’t want to be left holding the bag’: Jim Cramer is bullish on chipmaker SK Hynix, but warns of a boom-and-bust risk

“Their memory chips may sell at a huge premium, but the stock trades at a discount,” he said.

But Cramer warned that buying SK Hynix still comes with significant risk. Though the AI boom is driving unprecedented demand for memory chips, “the big concern is that, historically, memory chips have been a boom-and-bust business, so when supply eventually catches up with demand, you don’t want to be left holding the bag.”

Why the memory market is changing

The memory chip market has traditionally been characterized by extreme swings between shortages, which leads to a surge in prices, and oversupply, which leads to crashing prices. But the AI boom has altered this traditional boom-bust cycle.

Memory chip fabrication plants, or fabs, are incredibly expensive to build and operate. Only a handful of companies — including Samsung, SK Hynix and Micron — make memory chips, and it can take years to build new fabs.

Memory in the form of DRAM (dynamic random access memory) powers consumer electronics such as smartphones and laptops. HBM (high-bandwidth memory), on the other hand, is an ultra-fast type of memory that’s needed to power AI accelerators and GPU systems.

“A single AI server consumes 10 to 20 times more memory than a conventional workload server, so as the hyperscalers build out, they pull a hugely disproportionate slice of global supply,” Francisco Jeronimo, VP for EMEA and devices at market research firm IDC, told TechNewsWorld.

Production has been diverted away from consumer electronics (which is why the price of your phone is going up) to meet the needs of hyperscalers — cloud giants and AI developers — such as Amazon Web Services, Microsoft Azure, Google Cloud, Meta and Alibaba Cloud.

But fabs can only produce a finite amount of silicon wafers — used for DRAM and HBM — each year. And the big memory chip makers are prioritizing HBM, thanks to multi-year agreements with AI companies that pay billions upfront for guaranteed access.

This is squeezing supply and driving up prices while stabilizing demand and revenue for memory chip makers. For example, SK Hynix has a multi-year partnership with Nvidia to advance its next-generation infrastructure roadmap — guaranteeing access for Nvidia and protecting revenues for SK Hynix.

Is the boom-bust cycle over?

For the time being, the traditional boom-bust cycle has been upended, leading to severe shortages and price hikes with seemingly no end to the AI boom in sight.

With less supply for smartphones, computers and gaming consoles, consumer electronics are becoming more expensive. And memory chip makers like Samsung, SK Hynix and Micron have seen their profits (and stock prices) soar.

Some industry watchers say memory chips are no longer a cyclical commodity.

“The spot-buying, short-contract model is increasingly unworkable,” wrote Soo Kyoum Kim, associate program vice-president of semiconductors and enabling technologies with IDC, in a blog post. “Across industries, buyers are rethinking long-term agreements, dual-sourcing and design choices to reduce memory dependency risk.”

The only way to increase supply is to build more fabs — and it’s a lot more complicated than building a typical factory (and it’s why there aren’t more fabs in the U.S.).

It costs tens of billions of dollars to build a single fab, which includes costly lithography machines — the newest systems cost $380 million each — that print circuit patterns onto a silicon wafer. Plus, they require ultra-pure water and air, since a single speck of dust could ruin a batch of chips.

New fabs aren’t expected to come online until late 2027 or 2028.

Looking ahead

Others expect cyclicity to come back as supply increases and as AI systems become more efficient (doing more with less).

“Anytime people show me these curves that just go to the sky with no end, that never continues forever,” Willy Shih, a Harvard Business School professor who’s been tracking memory cycles since the 1980s, told Fortune. “This too will pass.”