For the last few decades, Micron Technology (MU 3.21%) has been a laggard in the U.S. technology industry -- struggling to surpass the highs it achieved during the dot-com bubble in 2000. However, everything changed with the arrival of generative artificial intelligence (AI), which has led to a surge in demand for its high-bandwidth memory chips (HBM).
The new demand has sent Micron's shares up 330% in the last 12 months alone. And the rally is expected to continue as memory chip shortages allow it to charge higher prices to consumers. That said, investors shouldn't expect the boom times to last forever. And Micron will need to translate its near-term success into long-term shareholder value. Let's dig deeper into what the next five years could have in store.
Why has Micron historically underperformed?
To understand Micron's future, we must first look at its past. Since its founding in 1978, the company has supplied computer memory and storage devices like DRAM and NAND flash. These are used in everything from personal computers to automobiles and cellphones. That said, despite having a wide range of use cases, memory hardware has historically been a punishing industry for long-term investors.
The industry's main challenge is cyclicality because computer memory hardware is highly commoditized. Chips produced by Micron won't be very functionally different from chips made by its rivals in China or South Korea. Couple this fact with high fixed costs and long manufacturing lead times, and you have the ingredients for consistent boom-and-bust cycles due to regular mismatches between memory supply and demand.
Micron has often delivered strong results despite these challenges. But it usually has a lower valuation compared to other technology companies because investors can be hesitant to invest in a company whose growth and margins could suddenly erode due to oversupply.
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Could generative AI change the game?
Generative AI has supercharged demand for computer memory. These devices are needed to store the vast amount of training data for large language models (LLMs), as well as provide the "working memory" for inference as they shift through trained data to answer user queries.
The industry may be experiencing its biggest boom cycle yet, with analysts expecting AI data centers to consume a whopping 70% of memory chip production in 2026. Furthermore, The Wall Street Journal reports that memory shortages are affecting many different memory use cases. And this trend is boosting Micron's growth and margins.
Fiscal first-quarter revenue (for the period ending in December) soared 57% year over year to $13.6 billion, powered by strength in the company's cloud memory segment, which sells high-end hardware to AI data center clients. This segment is important because of its high gross margin of 66%, which is up from 51% in the prior-year period.
Micron is also seeing rising margins across its other segments, like mobile and automotive. And investors should expect this trend to continue as memory chip shortages are projected to persist into 2027.
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What will the next five years have in store?
With analysts expecting the memory shortage to last for the next year or two, Micron has a small window to translate its windfall into long-term value. And it has already begun executing an ambitious expansion strategy. Last year, the company announced plans to invest $200 billion into U.S. chip manufacturing capacity and research and development.
This move will help the company onshore its operations, avoid political pressure, and potentially unlock economies-of-scale advantages over its Asian rivals after the current boom fades. That said, the huge capital outlay comes with some risks. If generative AI turns out to be a bubble, memory demand won't grow as fast as expected, and the market could face a severe and long-lasting oversupply that would hurt margins.
The good news is that with a forward price-to-earnings (P/E) of just 13, Micron still trades at a dramatic discount to the Nasdaq-100 average estimate of 25. And this valuation seems to price in the uncertainty while still leaving room for continued growth. Micron stock looks like a winner over the next five years.
