By now, investors are well aware of the big winners in artificial intelligence (AI): stocks like Nvidia and Palantir that have already delivered huge returns for early investors.
However, there are plenty of winners in AI, and some of them have been more overlooked than others. One stock that still seems undervalued even after doubling since the market dip in April is Micron Technology (MU -1.06%), a leading maker of memory chips, including high-bandwidth chips that are used for AI applications.
Micron is also an integrated device manufacturer, meaning it both designs and manufactures its own chips, differentiating it from companies like Nvidia, Broadcom, and Advanced Micro Devices. That exposes the company to added volatility due to the cyclical nature of the semiconductor industry, but it also gives the stock more upside in good times because it can fully capture the benefit of the AI boom.
Coming into the company's fiscal third-quarter earnings report, the stock had been rallying alongside the rest of the tech sector as concerns about tariffs and a recession have faded since President Donald Trump announced the "Liberation Day" tariffs and later paused them. Micron did not disappoint.
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Let the good times roll
The momentum continued in the third quarter as revenue rose 37% to $9.3 billion, and gross profit nearly doubled from $1.83 billion to $3.5 billion as gross margin expanded from 26.9% to 37.7%. That shows the company is benefiting from increased efficiencies as more of its business shifts to the data center sector, much of which is AI, and high-bandwidth memory (HBM).
Management noted that HBM revenue grew nearly 50% sequentially, and data center revenue more than doubled on a year-over-year basis to a quarterly record. The company also recorded an all-time high in revenue for DRAM (dynamic random-access memory), which includes HBM revenue. And 55% of its revenue came from data center and networking sales, up from 30% a year ago.
On the bottom line, Micron's performance also continued to improve with expanding margins as adjusted earnings per share (EPS) jumped from $0.30 to $1.68, and operating margin surged form 10.6% a year ago to 23.3%. Again, that figure improved sequentially, rising from 22% to 23.3%, a favorable sign.
The company easily beat estimates on the top and bottom lines, and the stock initially jumped on the results after hours, but then it pulled back as the company revealed that prices were down for some of its chips.
Nonetheless, guidance for the fiscal fourth quarter, its biggest of the year, was strong as well. The company expects revenue of $10.4 billion to $11 billion, up 38% from a year ago, and adjusted EPS of $2.35 to $2.65, up from $1.18 in the quarter a year ago.
Is Micron a buy?
Following the earnings report and updated guidance, Micron trades at a forward P/E of about 16, a substantial discount to the S&P 500 and its chip stock peers. Analysts also see earnings continuing to ramp up into fiscal 2026, forecasting adjusted EPS of $12 next year.
If those forecasts are correct, the stock certainly looks like a buy. The aforementioned pricing concerns seem to have led to a modest sell-off in the stock on Thursday following the earnings report, but the company looks well positioned to continue to benefit from growth in AI.
Its biggest customer is now Nvidia, and the relationship between the two companies seems to be getting stronger. Micron was invited to present its portfolio of data center memory and storage products at Nvidia's GTC conference in March.
It is also the only manufacturer of advanced memory chips in the U.S., making it a strategically important company, and it was awarded $6.2 billion to build new plants in the U.S.
Those factors, along with what appears to be a lasting tailwind in AI, should drive the company's growth for the foreseeable future. While Micron will experience another cyclical rotation at some point, it looks like an attractive buy at the current valuation.
