Cramer: The storage stocks that broke the cycle — and why he owns one

Jim Cramer says the old rules do not apply to memory and storage stocks. The CNBC host pointed to year-to-date gains that would have been unthinkable in prior cycles: SanDisk up 496%, Seagate up 238%, Micron up 208%, and Western Digital up 171%.

"These have been, for whole chunks of time, terrible and dangerous investments," Cramer wrote in a column Monday. "There would be periods of spectacular growth followed by horrendous swoons that would wipe out all of the gains."

The difference this time, he argued, is structural discipline. The four companies have locked in long-term supply agreements with customers, what SanDisk calls the "New Business Model." They have stopped building new plants to chase cyclical demand. They have returned enormous amounts of capital through buybacks: SanDisk has a $6 billion program, Seagate a $5 billion one, and Western Digital a $4 billion one. Only Micron does not buy back stock.

Gross margins have exploded. Seagate reported a non-GAAP gross margin of 47% last quarter, up from 35% a year earlier. Western Digital was at 51%, up from 40% five quarters ago. SanDisk went from 22% to 78% in one year. Micron hit 85%, up from 30%.

Those margin expansions have driven market-cap gains that Cramer called "not supposed to happen." Micron went from a $136 billion market cap to $1 trillion in a year. Seagate went from $30 billion to $220 billion. Western Digital went from $21 billion to $195 billion. SanDisk went from $6 billion to $244 billion. SanDisk's buyback would have bought the whole company one year ago.

Yet the stocks remain deeply out of favor. SanDisk trades at just 7.7 times next year's earnings estimates. "It trades there because people feel its earnings per share must fall apart," Cramer said.

Skepticism centers on whether the discipline will hold. Many investors expect someone to break ranks and build new capacity, or that Samsung will flood the market. Cramer acknowledged the risk. "I am nervous that they aren't differentiated enough and something could happen to the data center build-out that makes things slow down," he wrote.

He also cited a warning from CoreWeave CEO Michael Intrator, who told Cramer last week that "there was no way we wouldn't overbuild." Cramer responded that he cannot see the overbuild happening anytime soon.

The CNBC Investing Club bought a position in Micron this week. Cramer called it more of a growth stock than the others, and he remains uneasy. "No one is really comfortable buying stocks this high," he said.

He argued that the old maxim "this time is different" has cost managers who refused to own the group. "The graybeards always tell you that you can never say, 'this time is different,' because nothing ever changes," Cramer wrote. "Seagate, Western Digital, SanDisk, and Micron will not be able to change their stripes. Yet that is the attitude that has led to tremendous underperformance by managers who think like that."

Cramer pointed to data center demand as the structural driver. Amazon's cloud unit, a Club holding, has become a huge profit center. Anthropic's revenue of over $11.5 billion in the quarter signals that the opportunity is too large to slow down, he said.

"With the exception of Nvidia and perhaps Advanced Micro Devices, these companies – Seagate, Western Digital, Micron, and SanDisk – are perhaps the most indispensable of the entire buildout," Cramer said.

He recommended owning one of the four. The Club picked Micron for its growth profile. He said the others carry less risk because they keep returning cash through buybacks, demonstrating the discipline they now follow.

Cramer's Charitable Trust is long Micron, Nvidia, and Amazon.