For a decade now, I have counseled my readers against buying memory company stocks like Micron Technology and SK Hynix. These companies make a commoditized product that is prone to sharp inventory cycles and wildly swinging prices. If you buy the stock and guess wrong on the timing, the pain can come quickly. This highly cyclical process is why Micron, one of the Big Three memory makers, gets a lower valuation multiple than other chip companies, even when sales are soaring as they are now. Investors are always waiting for the next shoe to drop.

As my colleague Tae Kim wrote in his Barron's Tech newsletter this past Wednesday, it's probably best for long-term buy-and-hold investors to stay away. But for the first time ever, I see reasons to believe that we may be in the middle of an extended cycle that isn't subject to some of the usual factors. Investors with shorter time horizons who can stomach risk should still consider investing in Micron, even after a 229% share price rise in the last 12 months.

Memory cycles begin with inventory aligned to sales. As demand heats up, production capacity falls behind, order books fill, and inventories dwindle. Some memory customers make it worse by pulling forward purchases to guarantee future supply. The price of memory rises quickly, and manufacturers frantically try to bring new capacity online.

From the outside looking in, revenue climbs quickly and, because of the high fixed costs of the business, profit margins jump. The stock also soars, which is where we are today. Micron's price/earnings ratio for the next 12 months typically ranges from six to 16; it's at 9.4 now.

But the seeds of the down-cycle are already being planted. The pull-forward in sales means that revenue in future quarters suffers. This frequently happens at the same time that consumer spending flags, and new factories come on line. Inventories bloat, and memory prices crash. Most recently, we saw this in Micron's fiscal 2023, when sales halved from the year before, and the company suffered from a negative gross margin.

But today's cycle is different in two key respects. First, it isn't being driven mainly by consumer products demand, which is cyclical, but rather by the artificial-intelligence data-center investment boom -- more of a secular shift. In fiscal 2023, only 12% of Micron's sales were downwind of AI data-center spending. But in the latest quarter that was 39%, a figure that's set to keep rising, at least in the near term.

The AI market is focused on three types of high-end memory, all in short supply. High bandwidth memory, called HBM, is the fastest and most expensive, and it comes with the best profit margins. Because of the cost, it was used sparingly before the AI boom, when eliminating computing bottlenecks became more important. HBM has gone from nothing to a substantial business in just a few years. As long as the AI data investment boom continues, the fast expansion should continue.

This is a crucial piece to the puzzle, because production of one gigabyte of HBM supplants three gigabytes of other types of memory, worsening shortages down the line.

Competing with HBM for factory space is the fifth generation of double data rate memory, or DDR5, which also goes into AI data centers. To reduce server power consumption, AI-chip leader Nvidia began using the low-power variant in its designs, which is also the type of memory used in high-end smartphones and laptops. The shift means demand for data- center parts is now in direct competition with consumer devices.

Finally, chips for high-speed storage, known as NAND, are also experiencing a crunch. Nvidia exacerbated the situation this past Tuesday at the CES tech confab in Las Vegas when it said it was adding more NAND to servers to remove a key bottleneck.

During a CES Q&A, Nvidia CEO Jensen Huang said that NAND demand for this one AI function "will likely be the largest storage market in the world."

The statement pumped up shares of Sandisk, a pure play on NAND that was spun out of hard-drive maker Western Digital last year. Sandisk shares were up 28% on Tuesday, and they have risen 829% since the stock listed in February.

There are a limited number of players producing these in-demand chips: Micron and Korean giants Samsung Electronics and SK Hynix. And that takes us to the second reason this cycle is different: The three companies have been much more restrained than usual in adding new capacity. Micron won't add substantial new manufacturing space until mid-2027. If everything goes well, a new Hynix factory could start mass production at the end of 2026, fully ramping up in 2027. Samsung, which on Wednesday reported a 100% utilization rate at its memory factories, is converting a factory for other chips over the course of 2026 to increase HBM production, but the big addition doesn't arrive until 2028.

Chinese memory companies can fill in gaps with low and midrange chips, but outside of China they won't be able to compete with the Big Three for AI business -- for both technical and geopolitical reasons.

Micron and Sandisk have the wind at their backs and, for once, it isn't powered by consumer products. Their stock rally could continue for much of the next 12 months. But not everything has changed. These still aren't buy-and-hold investments. We'll be keeping track for any signs of the next great memory crash.