After a huge run over the past year, Micron Technology's (MU 0.35%) stock has been kicked to the curb. The stock lost as much as a third of its value in the weeks after the company reported one of the most extraordinary earnings reports you'll ever see (It has since recovered some of the loss and now trades down about 19% from its recent high).
NASDAQ: MU
Key Data Points
The natural assumption would be that the stock's valuation just got too high, and it was priced for perfection. However, that is far from the case. In fact, the stock now trades at a forward price-to-earnings (P/E) ratio of just 3.3 times fiscal 2027 analyst earnings estimates (Micron's fiscal 2027 ends August 2027). On the surface, that is a remarkably cheap valuation for a company that just tripled its quarterly revenue and saw its gross margin expand from 36.8% a year ago to 74.4%.
Given Micron's valuation and growth, the stock potentially tripling by 2030 isn't a stretch by any means. However, achieving this will take much more than simple multiple expansion. First, we have to look at how Micron got here and why it trades at such a low multiple.
Image source: The Motley Fool.
Is Micron's situation cyclical or structural?
The memory market that Micron operates in has historically been very cyclical, with big boom and bust periods. While Micron makes both DRAM (dynamic random access memory) and NAND (flash), its main business is DRAM, which makes up about 80% of its revenue. The company essentially is part of an oligopoly in the DRAM market along with Korean companies Samsung and SK Hynix, although it has historically been more of a follower in the space.
The DRAM market has exploded with the rise of artificial intelligence (AI), and AI chips, like graphics processing units (GPUs), need to be packaged with a specialized form of DRAM called high-bandwidth memory (HBM) to optimize their performance. HBM has strong unit economics and high demand, which has led the big memory makers to dedicate much of their manufacturing capacity to it. At the same time, HBM requires upward of 3 times the wafer capacity as ordinary DRAM, which has created an overall DRAM market shortage. This has led to skyrocketing DRAM prices, which are boosting Micron's revenue and gross margin.
The question then is, when does this cycle end, or will it? HBM demand should ultimately follow AI chip demand, given how they are linked, although we'll see how advancements such as Alphabet's TurboQuant compression algorithm could eventually impact that. Meanwhile, Micron and its competitors are working with HBM customers to secure long-term agreements with minimum volume commitments and quarterly pricing adjustments, which should reduce some of the cyclicality of its business.
Micron has something to prove
Micron has already shown it can move from a follower to a leader in the memory space by being in mass production with its HBM4 for Nvidia's new Vera Rubin platform. Now it needs to show that it's not just the beneficiary of a cyclical boom, but that its business today is much more grounded in structural growth drivers. It should be able to do that by signing more stable, long-term contracts for HBM.
For its stock to triple from here, Micron doesn't need another strong earnings report; it needs to demonstrate that it is a long-term AI winner that deserves an AI infrastructure stock multiple.
