Micron Technology (MU -5.90%) is one of the world's top suppliers of high-bandwidth memory (HBM) for data centers, which helps maximize processing speeds in artificial intelligence (AI) workloads. Demand for this hardware is off the charts, resulting in a severe shortage that is giving Micron the ability to dictate prices.
But despite these favorable conditions, Micron stock recently plummeted by 32% from its June record high. Concerns are growing about the sustainability of the AI infrastructure spending boom, as the soaring cost of chips and components threatens the financial viability of deploying AI software.
To keep things in perspective, Micron stock is still sitting on a one-year gain of almost 700%, so the sky isn't exactly falling just yet. But here's why I won't be buying the recent dip.
Image source: The Motley Fool.
Why Micron stock is sinking
According to a forecast by Bloomberg, there will be around 118 gigawatts' worth of data center capacity installed across the U.S. by 2030 to support the AI boom. Nvidia CEO Jensen Huang says building a single gigawatt worth of capacity requires $50 billion worth of capital investment, so if Bloomberg's forecast proves to be accurate, America's tech giants will have spent a staggering $5.9 trillion by 2030.
Those companies have to generate a return on all of that capital spending, otherwise it wouldn't make economic sense. Some of them will achieve this by renting computing capacity to other businesses for a fee, while others will charge for the use of their AI models and software applications. But as hardware prices continue to soar, AI companies have to charge their customers more money, and it's quickly becoming unsustainable.
Microsoft and Anthropic recently implemented price increases for some of their AI software products, with concerning results. For example, Uber Technologies burned through its entire 2026 AI budget in just four months by using Anthropic's Claude Code, and the company's chief operating officer said it's becoming hard to justify the current rate of spending.
Amazon and Walmart recently joined Uber in capping AI usage for their employees to prevent further budget blowouts. But they aren't alone, because a survey by UBS Group found that 60% of businesses are now routing tasks to cheaper, more efficient AI models to help reduce costs.
Any reduction in AI software spending will mean less demand for computing capacity, and the knock-on effects will eventually hit chipmakers like Micron in the form of weaker sales. The recent decline in Micron stock is Wall Street's way of pricing in this potential risk.
NASDAQ: MU
Key Data Points
Micron's revenue continues to soar
The recent AI jitters haven't shown up in Micron's financial results. The company delivered a record $41.4 billion in total revenue during its fiscal 2026 third quarter (ended May 28), a whopping 346% increase from the year-ago period. AI-related memory demand for data centers, computers, smartphones, and even cars fueled significant sales growth across all four segments of the business.
Micron also generated earnings of $24.67 per share during the quarter, a remarkable 1,368% increase from the year-ago period. As I mentioned earlier, the global memory shortage is giving the company incredible pricing power, and this is boosting its profit margins.
Micron's guidance for the current quarter (which concludes at the end of August) points to further strength, with $50 billion in revenue and earnings of $30.73 per share potentially on the table. However, there is still time for a demand slowdown to impact the official results.
Micron stock is cheap, but I'm not a buyer
Based on Micron's trailing 12-month earnings of $44.23 per share and its closing stock price of $823 last on Friday, July 31, it's trading at a price-to-earnings (P/E) ratio of just 18.6. That is a substantial discount to the Nasdaq-100 index which has a P/E ratio of 32.6, suggesting Micron is undervalued compared to its big-tech peers.
Moreover, Wall Street expects Micron to grow its earnings to $153.74 in fiscal 2027, placing its stock at a forward P/E ratio of just 5.3. By all accounts, this stock looks like an absolute bargain right now.
But if demand for AI hardware does soften, then Wall Street's earnings forecast might be too ambitious. There is also risk on the supply side, because Micron and all of its competitors are frantically building more manufacturing capacity to meet demand, so they will eventually give up some of their pricing power. At that point, it will be difficult for Micron to maintain its current level of earnings, so its stock might actually be more expensive today than its forward P/E ratio implies.
It's hard to nail down a fair price for Micron stock in the face of all this uncertainty, so I won't be taking advantage of the recent dip.
