Memory chip maker Micron Technology (MU -0.42%) is grooving nowadays. The stock more than doubled in 52 weeks, including a 27% surge in the last month alone.
It's fun to see a longtime favorite stock post record share prices and return to valuation ratios not seen since the height of the dot-com bubble, but will Micron shares stay at these lofty heights? Is Micron's stock surge built on solid ground or shifting sand?
I'm not so sure, actually.
Building blocks of the digital age
Micron is a leading maker of memory chips. The product range covers many popular memory types, from the short-lived but fast DRAM used in every computing system to the more permanent NAND chips (formerly known as flash chips) that make up solid-state storage solutions with higher performance than classic hard drives.
Both DRAM and NAND chips are in high demand right now. Artificial intelligence (AI) systems require a ton of high-speed DRAM capacity, and they also need a lot of speed-sensitive long-term storage. At the same time, smartphones are starting to sell again after a couple of years with low consumer interest -- and recent flagship models with special AI features can use double the DRAM of a comparable handset without AI functions.
Micron is enjoying strong end-market demand and solid revenue streams. And management expects the good times to keep rolling for a while.
"We believe Micron is one of the biggest beneficiaries in the semiconductor industry of the multi-year opportunity enabled by AI," CEO Sanjay Mehrotra said in a prepared statement.
So shipping volumes are on the rise. At the same time, the semiconductor industry still faces supply-side shortages. That may sound like bad news, but a tight supply and demand balance leads to higher unit prices on the limited number of supply-side memory chips. As a result, Micron's revenue is soaring even when unit volumes are down. For example, the shipping volume of NAND products fell slightly from the first quarter to the second quarter of fiscal year 2024. But NAND revenue rose by 27% anyhow.
All in all, Micron's DRAM sales jumped 54% higher year over year while NAND revenue increased by 81% over the same period.
Don't forget the memory sector's long-term trends
At the same time, Micron isn't setting business records right now. It operates in a brutally cyclical industry, and the downswing that started with the inflation crisis may not be over yet.
Revenue added up to $18.3 billion over the last four quarters, a long way behind the $33.4 billion record seen two years ago. Free cash flow also soared in 2022, but fell back to negative territory early last year. The company is consuming cash at the moment, not stuffing cash profits into its deep pockets.
MU Revenue (TTM) data by YCharts
In other words, Micron's stock price is soaring on somewhat flimsy wings right now. Bullish investors expect years of AI-driven business success, shrugging off the potential headwinds of an unpredictable global economy and the seemingly never-ending lack of chipmaking capacity.
For me, Micron has been a fantastic moneymaker in the long run. The shares I bought in the summer of 2011 have gained 1,200% so far while the dividend-adjusted S&P 500 index "only" rose by 400%.
I'm not looking to add more Micron shares right now, because the stock may be overdue for a correction. The recent price surge looks overly enthusiastic. It makes more sense to sell a few shares (but not close out the entire position) and move some of my Micron gains into lower-priced ideas. My favorite holding period may be "forever," but there's nothing wrong with rebalancing the limited investment funds every now and then.
