Why you should buy the Google-related pullback in memory stocks

Investing.com -- Memory stocks declined Wednesday as investors reacted to Google’s announcement of TurboQuant, a new compression algorithm designed to reduce memory requirements for AI systems, even as the broader technology sector posted gains.

SanDisk Corporation (NASDAQ: SNDK) fell 5%, Micron Technology (NASDAQ: MU) dropped 4%, Western Digital (NASDAQ: WDC) declined 3.7%, and Seagate Technology (NASDAQ: STX) slid 4%. The declines occurred as the Nasdaq 100 advanced.

Google’s TurboQuant uses a 3-bit compression technique for AI models. However, Lynx Equity Strategies analyst KC Rajkumar questioned the significance of the development in a note to clients.

"Vector quantization is hardly a new idea as LLM models went from 32-bit data in original training models to 4-bit data used in inference models today," Rajkumar wrote.

The analyst took issue with third-party technology blogs describing the technique, calling their coverage an oversell. Rajkumar disputed claims of an 8x improvement, noting that the comparison was made to older 32-bit models rather than the 4-bit quantized models currently in use.

"While there may be an improvement, it is not 8x, in our view," Rajkumar stated.

The analyst noted that AI providers need to innovate to address bottlenecks as token context length increases in inferencing. However, Rajkumar said this does not reduce demand for memory and flash over the next three to five years due to supply constraints.

"Advanced compression techniques merely reduce bottlenecks without destroying demand for dram/flash," Rajkumar wrote.

Lynx Equity Strategies maintained its $700 price target for Micron and reiterated its buy recommendation. "We would be buyers into the Google-related pullback today," the analyst added.

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