Micron's blowout results could give the AI story a new boost
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Our Equity Top Pick List
We have updated our Equity Top Pick List to reflect the events of the past quarter. The list includes those stocks, typically US and European ones, that we consider to be proper investment choices from a fundamental point of view. It can provide a starting point for building a sector-diversified equity exposure in portfolios, but can also be used as a watch list. Technical analysis should be used to time / determine the specific investment decision.
Could the momentum return in the semiconductors?
The semiconductor sector has had a challenging quarter, with its performance in recent months lagging behind improvements in underlying fundamentals, even as AI-driven demand remained exceptionally strong. The accelerating adoption of AI by enterprises and the proliferation of AI agents are significantly increasing the demand for computing capacity, which points to a further surge in cloud services and data center investments. Given current supply constraints, record-high backlogs, and higher-than-expected investment needs, we expect further upward revisions to earnings forecasts in the semiconductor industry. Nevertheless, the sector’s valuation appears favorable from a historical perspective, which, in our view, could result in a more attractive risk-return profile in the coming months.
Micron Technology, the largest memory chip manufacturer in the United States, has achieved results that are outstanding even by historical standards. The company far exceeded expectations in every respect and also delivered a significant positive surprise in terms of its forecasts. In addition, it announced 16 new long-term strategic agreements that lock up a significant portion of its manufacturing capacity for years to come. These agreements significantly improve the longer-term revenue outlook, which previously represented the greatest risk for players in the traditionally highly cyclical memory market. We continue to view the fundamental outlook for this stock—which is also included on our Equity Top Pick list—as strong, and are therefore raising our fair value estimate from $550 to $1,635.
We continue to maintain Micron on our Equity Top Pick List
Quarterly earnings report
Micron’s shares were among the best-performing stocks on the U.S. stock market this year, rising nearly 270%, driven by significant price increases resulting from supply shortages and dynamic growth in demand in the memory chip market. In response to the earnings report, investor focus was primarily on the extent to which the favorable trends observed in the memory industry would prove sustainable.
Particular attention was focused on the evolution of industry players’ pricing power — which is best reflected by trends in gross margins — as well as on how long the current cycle might persist and to what extent the current, historically exceptional revenue and profitability levels can be considered sustainable. Micron’s earnings release provided positive confirmation on these questions across all key areas, which was clearly reflected in the market’s reaction, as the stock price rose by approximately 17% after the market closed.
The chipmaker’s revenue for the quarter just ended approached $41.5 billion (+346% YoY), significantly exceeding the already high expectations of $35.7 billion. The two main drivers of this growth were increased demand for high-bandwidth memory (HBM) chips required for data centers and extreme price increases resulting from shortages of more traditional memory products. The company’s gross margin continued to rise from all-time highs, reaching 84.9% (vs. analysts’ estimates of 81.9%), indicating a brutally strong demand. Furthermore, the company’s management expects this to rise further in the next quarter and could reach 86%.
Furthermore, even with a market capitalization of over 1,000 billion, Micron is still able to post profit growth of over 1,000%, which is unprecedented even by historical standards. Earnings per share of $25.1 (+1,215% YoY) significantly exceed the $20.5 EPS expectations. Furthermore, based on management’s forecast, no change in these trends is expected in the near future, revenue could reach $50 billion in the current quarter (vs. an expectation of $43.2 billion), while EPS could rise to $31 (vs. an expectation of $25.3).
In addition, the company has entered into strategic agreements with 16 customers, totaling more than $100 billion, with an average term of three years. These types of longer-term contracts may help mitigate the strong cyclicality traditionally characteristic of the memory chip industry, which could result in a more balanced trajectory for revenue, earnings, and cash flow in the coming years. The reduction in volatility of fundamentals, combined with improved revenue visibility, significantly reduces risks and increasingly positions the stock as a structural play rather than a cyclical one — in line with our investment thesis.
Since we added Micron Technology to our Equity Top Pick list 10 months ago, its stock price has risen more than 10-fold, however, given the favorable industry trends and strong growth prospects, we are keeping the stock on the list and raising our price target to $1,635 from the previous $550.
Valuation
By comparison, the company’s shares are trading at a forward 12-month P/E ratio of just 7.8, which is lower than the typical end-of-cycle valuation range of 9–12 in the industry. This appears particularly favorable in light of the fact that AI-driven investments and memory chip orders point to a more enduring structural trend in demand. Although current revenue and profit dynamics — projected revenue growth of 230% and earnings growth of 730% 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 its peers 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 $550 to $1,635.
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.
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