Share prices of Micron Technology (MU 2.20%) are up 22% over the last five years, down 40% from their all-time high in early 2022, and up 26% in 2023. Along that timeframe, it's been a volatile couple of years, but these swings go with the territory in the memory chip market.
Micron is dealing with the worst industry downturn in 13 years. Management forecasts the next quarter's revenue total will fall 58% year over year. But that doesn't mean long-term investors should avoid the stock. Despite a cyclical industry, Micron has delivered a 543% return over the last decade, more than doubling the return of the S&P 500 index.
Micron is benefiting from long-term tailwinds in rising demand for memory and storage chips, and the increasing adoption of artificial intelligence (AI) to train natural language models and recommendation systems could accelerate demand over the next decade.
Here are two reasons the stock could be a great value right now.
1. Micron management expects the business to return to sequential growth
Micron is not suffering from lower demand. In the most recent quarter, revenue fell 10% over the previous quarter due to a decline in selling prices of memory chips, while there was an increase in total bit volume shipped. Bit shipments for Micron's dynamic random access memory (DRAM) grew at a mid-teens rate, while shipments for non-volatile memory (NAND) increased at a mid- to high-single-digit percentage over the previous quarter. The increase in bit volume indicates Micron's customers, including data centers, smartphone manufacturers, and individual PC users, continue to invest in adding more memory and storage capacity.
It's normal for the industry to experience periodic downturns in selling prices. To identify the bottom of the cycle, you want to look for efforts to rein in capital spending to bring down inventory. It's a matter of matching supply with demand. Once supply is less than demand, memory prices will go back up and Micron will return to growth.
On this front, there was good news in the earnings report. Micron's updated outlook calls for a 40% reduction in capital expenditures, with bit supply growth for DRAM expected to be "meaningfully negative."
"We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply-demand balance in the months ahead," CEO Sanjay Mehrotra said. Mehrotra added that revenue is close to returning to sequential growth in the company's quarterly results.
MU Revenue (Quarterly) data by YCharts.
Management's guidance for the fiscal third quarter calls for revenue to be roughly flat over the second quarter, which is a good sign that the bottom of the cycle is forming.
2. AI is expanding Micron's growth opportunity
Meanwhile, Micron is well positioned for long-term growth. Management noted on the earnings call that the production yields on its 1-alpha DRAM and 176-layer NAND products are the highest in the company's history. The company is also prepared to ramp up its most advanced 1-beta DRAM and 232-layer NAND products, even as it reduces capital spending this year.
The success of OpenAI's ChatGPT generative AI app has caused companies to scramble to get on board the AI train. Micron's CEO sees a possible explosion of new use cases on the horizon.
"As more applications of this technology proliferate, we will see training workloads in the data center supplemented with voice spread influence capabilities in the data center as well as in end user devices, all of which will drive significant growth in memory and storage consumption," Mehrotra said.
This could lead to a bigger growth opportunity than the market is expecting. The stock's forward price-to-earnings ratio currently stands at a cheap 6.8 based on this year's consensus earnings estimate.
Even on a price-to-book basis, Micron stock is trading toward the lower end of its previous 10-year range. But this seems to significantly undervalue Micron's future since new AI services like ChatGPT require eight times more DRAM and three times more NAND capacity.
MU Price to Book Value data by YCharts.
Wall Street is turning more positive. While it might take Micron a quarter or two to return to sequential growth, analysts at BMO Capital and Raymond James give the stock an outperform rating and see an attractive risk-to-reward proposition ahead of a cyclical recovery.
Demand is on the verge of exploding, which is a catalyst to lift Micron from its slump. The main risk is a prolonged recovery, so it might make sense to wait for Micron to actually report a revenue increase before buying the stock. The disadvantage of playing it safe is that the stock will likely be trading higher at that point.
For investors who have some cash to spare and can accept some near-term volatility, buying a small position now and adding more shares once the recovery is fully underway makes sense, too. Either way, Micron's long-term upside looks attractive from the current share price.
