In recent weeks, the market has shown artificial intelligence fatigue, as concerns have mounted and investors wonder whether the rally can continue without a pullback first.
However, some of the AI-bottleneck trades remain as strong as ever.
The AI memory maker Micron (MU 6.59%) just reported blowout third-quarter earnings results. Earnings per share of $25.11 beat Wall Street consensus estimates by $4.72. Revenue of $41.5 billion beat estimates by $6.4 billion.
Revenue quadrupled from the prior year. Furthermore, Micron is now guiding to $50 billion in revenue for its current quarter.
Micron also said it has secured 16 contracts with customers, including data centers and automakers, in the three- to five-year range that could bring in $22 billion. This provides investors with solid visibility into future revenue.
Micron stock traded nearly 14% higher, as of 11:50 a.m. ET.
While the company has done incredibly well, with its stock up over 800% in the past year, there is still debate about how far memory stocks can run.
Here’s why everyone is talking about Micron.
Image source: Micron.
Can a historically cyclical stock become a long-term AI powerhouse?
Micron is one of the leading memory manufacturers, specifically regarding dynamic random-access memory (DRAM) and NAND flash memory.
Memory is key to feeding data to graphics processing units (GPUs), so as GPU clusters and data centers scale, more memory is needed.
Analysts at UBS have previously said that DRAM is likely to be constrained until at least halfway through 2028, while NAND is likely to be constrained until at least the end of 2027.
However, prior to this AI supercycle, Micron and other memory makers were viewed as cyclical stocks due to the difficulty in balancing supply and demand within a reasonable time frame.
Some Wall Street analysts still think this is the early innings for the memory trade.
NASDAQ: MU
Key Data Points
"We are seeing no cracks in AI demand on the chips/hardware or software front which gives us a bright green light to own the core tech winners into year-end," Wedbush analyst Dan Ives said in a recent research note.
But not everyone is entirely sold.
Bernstein analyst Mark Newman thinks Micron’s new strategic customer agreements could include pricing ceilings, which would limit how much Micron could raise memory prices.
"We wonder if the ceiling suggests limited headroom," he wrote in a recent research note, suggesting these contracts likely wouldn’t be able to avoid cyclicality.
Still subject to the AI trade
Micron has undoubtedly been on a phenomenal run and looks poised to benefit from the AI trade as much as any company.
The question investors need to ask is what happens to companies like Micron if the AI trade hits a wall, because the business and demand for memory are really dependent on AI.
It’s quite possible that the current AI run lasts much longer than investors think, or that AI will turn into a much bigger winner long term, even if it runs into some obstacles along the way.
On the surface, Micron’s valuation of close to 19 times forward earnings is not seemingly out of line. But the big question is what happens to the earnings, which have risen 1,368% year-over year.
If long-term investors still want exposure to memory, now a key part of the AI trade, I think they can buy Micron. But they should dollar-cost average to smooth out their cost basis over time and be prepared for volatility.
