Cramer says old chip cycles may be breaking as memory stocks surge

CNBC’s Jim Cramer told Investing Club members Thursday that the latest run in memory-chip stocks may be harder to judge using the old boom-and-bust playbook. For everyday investors, the takeaway is direct: some of the market’s fastest-rising semiconductor names are still being pulled between strong demand and fears of a familiar collapse.

Cramer framed his view through a loss from his hedge fund days, recalling that Cramer & Co. once owned 4.9% of Western Digital 37 years ago before a weak preliminary fourth-quarter update hurt the position and, by his account, ruined his year. He said a recent nightmare about that episode reflects the fear many investors still have around component makers whose stocks have historically surged and then fallen hard when supply caught up with demand.

The group Cramer discussed includes Western Digital, Seagate, Sandisk, Micron and SK Hynix. He said Western Digital has climbed more than 180% this year, part of a broader rally in memory and storage-related stocks.

Why Cramer says this cycle looks different

Memory chips are parts used to store and move data inside computers, phones, servers and artificial intelligence systems. In past cycles, companies would add supply during good times, prices would weaken, and earnings estimates would fall. That pattern is why many longtime investors expect a bust after a sharp rally, according to Cramer.

Cramer said the current cycle has lasted longer than prior ones and is being supported by tight supply. He said chips are being rationed and that companies such as Micron, which he described as a data-center leader, and Applied Materials, which sells manufacturing equipment used by chipmakers, are receiving long-term contracts for their products.

Long-term contracts matter because they can make revenue more visible than in a spot-market cycle, where buyers and sellers react quickly to changing prices. Cramer said experienced fund managers remain skeptical that this can last, given decades of memory-chip history.

He also pointed to short selling as part of the market setup. A short sale is a bet that a stock will fall, usually made by borrowing shares and selling them with the aim of buying them back later at a lower price. Cramer said bearish bets can add fuel to gains when short sellers are forced to buy shares back as prices rise.

Valuations show the tension

Cramer cited SK Hynix as an example of the market’s doubt. He said the Micron competitor trades at six times next year’s earnings estimates, a low price-to-earnings ratio if those estimates are met. A price-to-earnings ratio, or P/E, compares a company’s stock price with its expected profit per share.

According to Cramer, that low multiple reflects concern that future earnings estimates may prove too high if extra supply arrives from competitors in places such as China, Japan or Malaysia. If actual earnings land far below forecasts, the stock would look more expensive than the headline P/E suggests.

Cramer said recent declines in some of these stocks are being driven by emotion rather than business fundamentals. He argued that sharp, nearly vertical moves can become unstable and that such moves often get cut sharply before finding a bottom.

He also connected the memory shortage to Intel. Cramer said the CNBC Investing Club is trying to build a larger Intel position because he believes central processing units, or CPUs, could become the next area of tight supply after memory chips. CPUs are the main processors that run computers and servers.

Cramer disclosed that his Charitable Trust owns Intel shares. CNBC states that Investing Club members receive trade alerts before Cramer makes trades for the trust, and that he waits 45 minutes after an alert before trading, or 72 hours if he has discussed the stock on CNBC TV.

This story draws on original reporting from CNBC.