Micron: another record quarter in the AI-driven supercycle
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Micron Technology, the largest U.S. memory chip manufacturer, released impressive figures in its preliminary report yesterday. The company significantly beat consensus estimates across all key metrics, and management is forecasting robust growth for the next quarter as well. The sustained strength of the demand environment is indicated by the fact that certain customers are already booking capacity 3–5 years in advance. To meet AI-driven demand, Micron has allocated $25 billion in capital expenditures for this year and plans a significant increase in this area next year. However, the exceptional capex did not meet with unanimous approval among investors, causing the stock to fall by 4%. Nevertheless, we continue to view the fundamental outlook for this stock — which is also on our Equity Top Pick list — as strong, so we are raising our fair value estimate from $325 to $550.
We continue to maintain Micron on our Equity Top Pick List
Quarterly earnings report
Micron shares have risen more than 60% this year, making it the best-performing stock in the U.S. semiconductor market. The company remains one of the biggest beneficiaries of the AI megatrend, as data centers’ memory requirements are growing dramatically. This demand is significantly diverting capacity away from traditional end markets—such as PCs and smartphones—resulting in persistent supply shortages and, consequently, significant price increases in the memory chip market.
Favorable industry trends continued to support demand for Micron’s products throughout the quarter, resulting in the company’s revenue rising to $23.9 billion (+197% YoY), significantly exceeding the consensus estimate of $19.7 billion. The market environment supporting the chipmaker substantially strengthened its pricing position: gross margin expanded to 75%, which is roughly double that of a year earlier and well exceeded analysts’ expectations of 69%. The growth was driven not only by demand for high-bandwidth memory (HBM) chips required for data centers but also by price increases for more traditional memory products. The company closed the quarter with EPS of $12.20 (+682% YoY), compared to the consensus EPS estimate of $9.00.
Management expects that the supply shortages driving industry fundamentals will persist in the current quarter, which could further improve Micron’s financial performance. Accordingly, the company anticipates revenue of $33.5 billion, compared to the consensus estimate of $23.7 billion. At the same time, EPS could rise to $19.20, which is about 70% higher than analysts’ previous expectations. According to management’s forecast, the improving pricing environment could push the gross margin up to 81%, which significantly exceeds the 72.4% consensus and would also mark a historic high for the company.
The outlook remains favorable in the longer term, as some customers are placing orders as far as five years in advance, signaling a longer cycle than ever before in the industry and potentially resulting in a persistently strong demand-driven market. Due to tight supply, Micron plans to spend $25 billion on Capex this year instead of the expected $22.4 billion and has signaled a further significant increase by 2027. However, the surge in capital expenditure needs negatively impacted investor sentiment, causing the stock to drop by about 4% in response to the earnings release.
In this cyclical industry, companies have historically tended to overinvest near the peak of the cycle, which later resulted in oversupply as demand declined and led to the disappearance of profits through a plunge in memory prices. At the same time, the current cycle differs from previous ones in both its scale and duration. Contracts locked in for several years ahead substantially improve revenue visibility, while announced capacity expansions are unlikely to have a significant impact on the supply side until at least the second half of 2027; however, it is conceivable that the demand-driven market could persist even after that. The company’s management is confident in maintaining strong business results, so they increased the dividend by 30%, although this still cannot be considered significant (~0.14% dividend yield).
Valuation
The company’s shares are trading at a forward 12-month P/E ratio of just 6, which is significantly lower than the typical end-of-cycle valuation range of 9 to 12 in the industry. This looks particularly favorable given that AI-driven investments and memory chip orders are more indicative of a mid-cycle phase. Although current revenue and profit dynamics – projected revenue growth of 150% and earnings growth of 480% by 2026 – are unlikely to be sustainable in the longer term, we still consider the company’s valuation attractive (even assuming a more moderate growth trajectory) relative to both competitors and historical averages. Accordingly, we continue to see potential in the stock, so we are maintaining it on our Equity Top Pick list and raising our previous price target of $325 to $550.
Investment story
- The wave of AI infrastructure development could provide Micron with a favorable structural tailwind. The company is an indirect but increasingly important supplier to the AI ecosystem, as it supplies high-bandwidth memory (HBM) chips for the high-end server platforms of Nvidia and AMD, among others. These products are considered the company’s primary growth catalysts, but rising prices for memory chips used in simpler PCs and smartphones—driven by supply shortages—could also support growth throughout 2026.
- Beyond growth, it is strategically significant that the share of AI-related revenue is gradually increasing, which could mitigate the cyclicality typical of the memory chip industry in the company’s core fundamentals, such as revenue and gross margin. This improvement in the product mix and the resulting potential reduction in volatility across key earnings metrics could justify a valuation premium for the stock in the longer term.
- In addition, Micron is an active player in the field of data center and cloud infrastructure storage solutions, which gives it a further stake in the AI story. Furthermore, in the longer term, the company stands to benefit from the growth of numerous segments that require high computing capacity or significant data storage needs. These include, among others, self-driving vehicles, 5G smartphones, robotics, and in the future, even quantum computing – essentially any disruptive technology that relies heavily on memory-intensive infrastructure. The company is already present in some of these markets: it supplies memory solutions for automotive applications and 5G devices, and recently unveiled a new memory product – a pioneer in the industry – that is also suitable for use in space technology.
- Micron Technology places a strong emphasis on continuous innovation, which enables it to maintain its technological leadership in the memory industry, giving it a competitive advantage. In the highly concentrated DRAM market in the United States, Micron is effectively the only major player, while its main competitors are based in South Korea (SK Hynix, Samsung). This geographic positioning could be an advantage for the company, as Korean manufacturers may be more sensitive to current tariff and trade uncertainties.
Risks
For Micron, the primary risk stems from volatile fundamentals. The company exhibits strong cyclicality in both revenue and gross margin, which is also reflected in its valuation levels (a significant discount even relative to the broader market). If the current favorable supply-demand conditions were to shift toward equilibrium, it would significantly impair the company’s profitability and put pressure on its shares. Another risk factor is that the conflict in Iran could disrupt helium supplies to Asian countries, as the region relies heavily on Middle Eastern sources. Helium is a critical input in semiconductor manufacturing, so a prolonged supply disruption could affect the entire industry value chain.
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