Key Points
Micron Technology (NASDAQ: MU) has been one of the market’s hottest stocks over the past year, up nearly 600% through the last week of September. However, this may be a case of an artificial intelligence (AI) stock getting too far ahead of itself in a short period of time. As of this writing, you can buy one share of the company for around $1,080.
Micron is one of the big three memory makers along with its Korean counterparts SK Hynix (NASDAQ: SKHY) and Samsung. It gets about 75% of its revenue from DRAM (dynamic random access memory) and 25% from NAND. Prices for both types of memory have been skyrocketing, which is causing Micron’s revenue and gross margins to soar.
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Riding the memory supercycle
Historically, memory goes through large boom-and-bust cycles, where strong demand drives prices up, only to be followed by increased capacity that causes prices to collapse. The current memory cycles, however, seem a little different.
Both DRAM and NAND prices are currently being driven by strong demand from AI data centers and by the big three memory makers putting most of their efforts toward high-margin, high-bandwidth memory (HBM). HBM is a special form of DRAM that gets packaged with graphics processing units (GPUs) and other chips to reduce latency and improve performance.
Demand is through the roof and has become one of the biggest bottlenecks in AI, with the major AI semiconductor companies scrambling to lock in longer-term deals to secure future supply. Meanwhile, NAND is also in high demand as frontier model companies need enormous numbers of solid-state drives (SSDs) with flash memory to store their massive amounts of AI training data.
HBM supply is currently constrained because it is competing for the same extreme ultraviolet lithography (EUV) machines that advanced chips like GPUs need in their manufacturing process. At the same time, HBM requires around three times the wafer capacity as ordinary DRAM. With the big-three memory makers throwing most of their resources at increasing HBM capacity, this has ironically led to conventional DRAM and NAND prices rising much more than already high-priced HBM prices.
This has benefited Micron, which, among the big three memory makers, derives the least revenue from HBM. As such, its revenue has skyrocketed, and gross margins have expanded much faster than rival SK Hynix, the HBM market leader.
Where could Micron trade at in 5 years?
Analysts aren’t expecting Micron’s cyclicality to go away, but they also aren’t anticipating a huge bust cycle like in the past, when earnings would turn negative. Backed by continued strong demand for memory from AI and longer-term contracts, this memory cycle is different, but it hasn’t completely changed. Meanwhile, as one of the big three memory makers with the least percentage of revenue coming from HBM, Micron is more exposed when ordinary DRAM and NAND prices start to pull back.
Analysts currently project that Micron’s earnings will peak in fiscal 2028 (ending August 2030) at over $180 per share. The consensus then sees earnings troughing at $48.21 in fiscal 2030, then moderately climbing from there.
Micron currently trades at a forward price-to-earnings (P/E) of just 6.8 times fiscal 2027 analyst estimates. That is typical of what the company trades at near peak earnings. In a more ordinary earnings environment, I’d expect the stock to trade closer to a 12-times to 15-times multiple. The consensus currently projects that Micron will generate around $50 in earnings in fiscal 2031, though that estimate is based on only one Wall Street analyst.
Based on that, I’d expect the stock to trade between $600 and $750 in five years, which is where a $1,080 investment would also drop to in this scenario. Of course, if memory stops being cyclical or the earnings floor is raised, Micron’s earnings and stock price could be higher in five years.
That said, Micron is the most commoditized of the big-three memory makers, which is why I’d prefer HBM leader SK Hynix in the space over the long term.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.
