Micron Technology (MU -7.24%) has had a great year, with its shares rising about 217% so far. However, following a sell-off in early July, they are still down 25% from an all-time high set in late June.
A midyear sell-off like this shouldn't come as a surprise to investors since many of them wanted to lock in some profits. That's shortsighted thinking, though; the tailwinds that pushed Micron higher in the first part of the year are still there, and I wouldn't be surprised if the stock sets a new all-time high within the next few months. But how high can it rise? Let's take a look.
Image source: The Motley Fool.
The AI build-out continues
Micron makes memory chips, and the artificial intelligence (AI) data center boom is consuming nearly all of its capacity. Memory chips have become the primary bottleneck in data center construction, and with high demand and low supply, prices are soaring.
The chipmaker is a beneficiary of soaring prices, boosting its revenue and profits. This situation can be resolved in one of only two ways.
First, the memory chip suppliers could dramatically increase supply to meet demand. This takes time, and Micron is building more production capacity to do just that. However, each year, AI hyperscalers continue to increase their data center spending, so this supply expansion may not be enough.
NASDAQ: MU
Key Data Points
Second, the hyperscalers could just quit building data centers, and demand would evaporate. This is a pretty unlikely scenario since the big tech companies are convinced there is major value in increasing AI computing capacity. A more realistic thought along the same lines is that AI hyperscalers could decrease their building plans, which still seems unlikely.
So, the only two ways for the memory chip market to correct the supply/demand imbalance are a time-consuming option or a highly unlikely action. As a result, I think that an investment in Micron is fairly safe, at least in the short term. Management backs this up, projecting that tightness in the memory chip market will last beyond 2027.
With AI demand expanding and more supply being a ways off, memory chip prices will continue to rise, and Micron will be a huge beneficiary. Wall Street analysts agree: They anticipate its revenue rising 84% during fiscal 2027 (ending August 2027), with earnings per share rising from $73.44 to $153.74. That prices the stock at a cheap 6.4 times next year's earnings.
MU PE Ratio (Forward 1y) data by YCharts; PE = price to earnings.
So Micron is a cheap stock operating in an industry where the product is in short supply and high demand. That bodes well, and I think shares could be heading to new all-time highs very soon. Micron Technology's valuation may double at the very least, potentially causing the stock to surpass $2,000 per share.
