With shares up by roughly 1,200% over the last five years, Micron Technology (MU -0.32%) is a standout performer in the generative artificial intelligence (AI) megatrend. But the company's rocketship rally has come under threat. And shares are down around 23% from their all-time high of $1,213 reached on June 25th as investors grow nervous about competition and the sustainability of its high margins.
Let's dig deeper into Micron's pros and cons to decide whether the dip is a long-term buying opportunity or a sign of more trouble to come.
Image source: Getty Images.
A 47-year-old growth stock
Usually, large corporations find their raison d'etre early in their life cycles. But Micron has been a late bloomer. The company has spent most of the last few decades providing memory hardware for consumer markets, such as personal computers and smartphones, where it has endured brutal competition and low margins. Shares barely budged in the two decades between the dot-com bubble and the COVID-19 pandemic.
NASDAQ: MU
Key Data Points
However, the arrival of generative AI gave the company a new lease on life as data center operators quickly realized that high bandwidth memory had become one of the primary bottlenecks in creating more powerful large language models (LLMs).
Hardware shortages ensued, allowing Micron to enjoy the biggest operational boom in its history. Third-quarter revenue soared by an eye-popping 346% year over year to $41.5 billion, driven by higher prices and volumes across Micron's product portfolio. And the company now boasts a gross margin of 85%.
Is this time different?
Micron now boasts sky-high growth and margins, which are typically the catalyst for a stock to trade at an inflated valuation as investors bet that its current profits will be much bigger in the future. However, Micron stock turns this familiar dynamic on its head. With a forward price-to-earnings (P/E) multiple of just 6, the stock trades for a shocking discount.
The only real explanation for this is that investors don't expect the current boom to last very long. And there are very good reasons to be skeptical. Unlike an Nvidia chip (which relies on proprietary CUDA software) or a branded social media platform, Micron's memory business doesn't have a very strong economic moat to protect it from competition.
Memory chips tend to be commoditized, meaning specific chips aren't well differentiated from one another, and customers generally respond only to price. Historically, this has led to a repeating boom-and-bust cycle in the industry as supply eventually catches up to demand and suppliers enter a destructive race to the bottom to maintain market share.
Micron's CEO thinks this time will be different because of the sheer scale of AI-related demand. That said, it's hard to see this as true, given the massive amount of new production capacity that will come online over the coming years.
Micron is investing an eye-popping $250 billion in research and U.S. manufacturing capacity. And Micron's rivals aren't sitting still either, with China's YMTC aiming to become the world's top NAND memory producer by the end of 2027. The soaring levels of memory production could eventually overwhelm even AI-related demand over the next few years, leading to falling prices across the industry.
Is the dip a buying opportunity?
Micron has been one of the most rewarding tech investments of the last few years. And the stock's rock-bottom valuation suggests a big crash is unlikely (most of the potential future bad news is already priced in).
That said, investors who buy Micron stock now are late to the party. Shares probably won't sustain their explosive multi-bagger growth as memory supplies continue to increase and management continues to pour cash into capital expenditures that could take several years to pay off. It might make more sense to hunt for the next best thing rather than buy the dip.
