Memory-chip maker Micron (MU +4.04%) has historically been one of the most cyclical stocks in the chip sector. Memory is prone to boom and bust cycles as inventory levels and prices fluctuate according to supply and demand.
However, Micron has been one of the best performers in the semiconductor sector this year, a sign that investors may be underrating its momentum and that of the memory segment in the AI boom. Micron and its peers make high-bandwidth memory (HBM) chips that are an essential component of AI, and that's a key reason the stock has doubled this year, outpacing better-known industry players like Nvidia and AMD. That strength and momentum were on display in Micron's fourth-quarter earnings report.
After raising its guidance in August, the company topped both its updated guidance and analyst estimates.
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Revenue in the quarter jumped 46% to $11.32 billion, which topped the consensus at $11.16 billion. The quarter capped off a year with similar growth and full-year revenue of $37.4 billion.
The company also fulfilled an earlier promise, made in March 2024, that Micron would be one of the biggest beneficiaries of AI in the semiconductor industry, and that it would deliver record revenue and significantly improved profitability for the year it just completed. It did just that.
In addition to the strong revenue growth, gross margin improved from 35.3% to 44.7%, reflecting the ramping up of high-value data center products and pricing strength in dynamic random-access memory (DRAM), which includes HBM.
NASDAQ: MU
Key Data Points
Operating margin improved from 19.6% to 32.3% as it gained leverage on research and development and selling, general, and administrative expenses, and it reported adjusted earnings per share of $3.03, up from $1.18 in the quarter a year ago, and ahead of estimates at $2.86.
Micron stock was essentially flat on the report, but that seems to just be a reflection that high expectations were baked in after the stock rose roughly 40% in September coming into the report. Keep reading to see three reasons the stock can continue gaining.
1. Guidance shows results will get even better
Micron did not give guidance for the full fiscal year, but its outlook for the first quarter shows its momentum will continue into the current quarter.
It called for $12.2 billion to $12.8 billion in revenue, up 44% from the quarter a year ago at the midpoint and well ahead of the consensus at $11.83 billion. It also forecast gross margin to top 50% at 50.5% to 52.5% on an adjusted basis. The company's gross margin has only been above 50% one other time before, during a boom in the late 2010s.
2. Supply remains tight
Supply/demand dynamics are kind in Micron's business, so it's good news that management sees supply remaining tight in the year ahead.
Micron was sold out of HBM capacity for this year by June 2024, and management continues to see a tight supply environment in fiscal 2026, especially as demand for AI capacity keeps accelerating.
That dynamic should support high prices for Micron's products and strong margins into fiscal 2026. The company also said it expects to sell the remainder of its HBM supply for calendar 2026 in the coming months.
3. Micron is still a good value
Forward estimates on Micron have moved steadily upward, and should do so again following the latest earnings report. It now trades at a trailing price-to-earnings ratio (P/E) of 20, and a forward P/E of 12.5.
Compared to its peers in the AI sector, those are rock-bottom valuations, and it's still growing faster than many of its chip stock peers. In fact, its revenue growth is now rivaling that of Nvidia.
The low valuation seems to reflect the previous boom-and-bust cycles in memory, but the AI era may have introduced a new paradigm for the sector. While the same underlying dynamics still exist, the size of the market now seems to be significantly larger, meaning Micron could have more years of booming growth ahead of it -- good news for its investors.
