It says something about the memory business when skyrocketing profits can actually be a cause for worry.

Profits have never been a sure thing in the volatile industry. Memory chip makers Micron Technology and Sandisk, as well as hard-drive makers Seagate and Western Digital, have all produced annual operating losses at least once in just the last three years. But those days seem far in the past now, as the AI boom has sparked an epic run on memory chips and hard drives. Sales at all four companies have surged this year.

Sandisk and Micron are now generating around 80 cents of gross profit for every dollar of revenue. That compares to a wide range historically, from single digits to around 60 cents on the dollar.

That seems unsustainably high for companies in the very expensive business of physically manufacturing chips. But the unique nature of chip making also speaks to why the market conditions driving such profits won’t be changing anytime soon. Memory demand is growing sharply now, but new production facilities take years to build.

Spending on artificial intelligence would need to fall off significantly to make a dent in the industry’s current pricing power. And the biggest spenders in AI just signaled their intention to spend even more. Last week, Microsoft raised its capital spending forecast for the year by $25 billion, while Meta Platforms added $10 billion to its own planned outlay, with both citing rising component costs as the justification.

AI systems require large amounts of specialized DRAM memory to function, while the models running on those systems also produce large reams of data that need to be stored and fed back into the models at high speed. Those memory demands increase as the AI systems get more powerful. Meanwhile, production of that high-price memory is crowding out capacity for memory used in everything from smartphones to speakers to cars.

That is driving up prices for everyone. Even Apple—long-known for its prowess at managing the supply chain and wrangling favorable terms out of its vendors—now concedes that memory prices “will drive an increasing impact on our business,” according to comments from chief executive Tim Cook on the company’s earnings call last week.

The shortage is also driving up the stocks of memory makers. Sandisk is now worth nearly seven times what it was six months ago, while Seagate and Western Digital have seen their share prices nearly triple in that time. Micron, which has jumped 75% in just the past month, is now worth more than Exxon Mobil—in the midst of a booming oil market.

Gains like that make memory stocks look ripe for a fall, given the sector’s historic volatility. But demand for AI computing and the long lead time for building systems and data centers is also driving changes in business practices that could ultimately tame the memory sector’s volatility. Major buyers are now striking long-term contracts with suppliers to ensure access to vital components, with some deals reaching as long as five years.

That is a sharp change for an industry that has long run on 30-day deals. Sandisk said last week that it has signed “new business model” agreements with five major customers that cover more than a third of its production capacity for the next fiscal year. Western Digital said during its own call last week that it now has some supply agreements stretching into 2029.

Some of the memory stocks also still look cheap in a market that has been driving up semiconductor names. Micron and Sandisk trade at just seven to nine times projected earnings for the next four quarters, while the median valuation of stocks on the PHLX Semiconductor Index is now around 37 times projected earnings, according to FactSet data. Memory prices won’t stay high forever, but if the current shortage leads to a more sustainable business model, the stocks could shed their reputation for causing whiplash.

Write to Dan Gallagher at dan.gallagher@wsj.com

It says something about the memory business when skyrocketing profits can actually be a cause for worry.

Profits have never been a sure thing in the volatile industry. Memory chip makers Micron Technology and Sandisk, as well as hard-drive makers Seagate and Western Digital, have all produced annual operating losses at least once in just the last three years. But those days seem far in the past now, as the AI boom has sparked an epic run on memory chips and hard drives. Sales at all four companies have surged this year.

Sandisk and Micron are now generating around 80 cents of gross profit for every dollar of revenue. That compares to a wide range historically, from single digits to around 60 cents on the dollar.

That seems unsustainably high for companies in the very expensive business of physically manufacturing chips. But the unique nature of chip making also speaks to why the market conditions driving such profits won’t be changing anytime soon. Memory demand is growing sharply now, but new production facilities take years to build.

Spending on artificial intelligence would need to fall off significantly to make a dent in the industry’s current pricing power. And the biggest spenders in AI just signaled their intention to spend even more. Last week, Microsoft raised its capital spending forecast for the year by $25 billion, while Meta Platforms added $10 billion to its own planned outlay, with both citing rising component costs as the justification.

AI systems require large amounts of specialized DRAM memory to function, while the models running on those systems also produce large reams of data that need to be stored and fed back into the models at high speed. Those memory demands increase as the AI systems get more powerful. Meanwhile, production of that high-price memory is crowding out capacity for memory used in everything from smartphones to speakers to cars.

That is driving up prices for everyone. Even Apple—long-known for its prowess at managing the supply chain and wrangling favorable terms out of its vendors—now concedes that memory prices “will drive an increasing impact on our business,” according to comments from chief executive Tim Cook on the company’s earnings call last week.

The shortage is also driving up the stocks of memory makers. Sandisk is now worth nearly seven times what it was six months ago, while Seagate and Western Digital have seen their share prices nearly triple in that time. Micron, which has jumped 75% in just the past month, is now worth more than Exxon Mobil—in the midst of a booming oil market.

Gains like that make memory stocks look ripe for a fall, given the sector’s historic volatility. But demand for AI computing and the long lead time for building systems and data centers is also driving changes in business practices that could ultimately tame the memory sector’s volatility. Major buyers are now striking long-term contracts with suppliers to ensure access to vital components, with some deals reaching as long as five years.

That is a sharp change for an industry that has long run on 30-day deals. Sandisk said last week that it has signed “new business model” agreements with five major customers that cover more than a third of its production capacity for the next fiscal year. Western Digital said during its own call last week that it now has some supply agreements stretching into 2029.

Some of the memory stocks also still look cheap in a market that has been driving up semiconductor names. Micron and Sandisk trade at just seven to nine times projected earnings for the next four quarters, while the median valuation of stocks on the PHLX Semiconductor Index is now around 37 times projected earnings, according to FactSet data. Memory prices won’t stay high forever, but if the current shortage leads to a more sustainable business model, the stocks could shed their reputation for causing whiplash.

Write to Dan Gallagher at dan.gallagher@wsj.com