Up 30% This Year, Will AI Tailwinds Drive Micron Stock Higher?

MU: Micron Technology logo
Micron Technology

Micron Technology (NASDAQ: MU) posted a solid set of Q2 FY’24 results last week and provided upbeat guidance, as the company benefited from higher memory prices and rising demand for High Bandwidth Memory (HBM) targeted at AI applications. Micron’s revenue for the quarter stood at $5.82 billion, marking an increase of  57% from the year-ago quarter. Net income came in at $793 million, up from a net loss of $2.3 billion in the same period last year. For Q3, the company is projecting revenue of $6.6 billion, at the midpoint, almost 10% ahead of consensus estimates, and about 64% ahead of last year.

Memory prices have been trending higher, driven by a slew of factors. Firstly, memory majors including Micron and Samsung have pared back on their investment in memory capacity and have been rationalizing their production in recent months and this has been helping prices.  Moreover, the memory market is also seeing demand from the replenishment of memory inventory by smartphone OEMs. The PC market is also seeing a rebound. Per Trendforce, the projected growth rates for DRAM and NAND flash memory bit demand this year are close to 15% and in the mid-teens, respectively, outpacing the supply growth rates. Moreover, the advent of generative AI tools such as the popular ChatGPT is also likely to drive up memory demand since these algorithms typically require more storage and DRAM resources compared to other types of algorithms. AI requires high-bandwidth memory (HBM) for training large language models and inferencing quickly. GPU manufacturers are also bundling more memory into their systems.  Nvidia’s next-generation Blackwell AI systems have a 33% increase in the HBM3E content.  Micron has indicated that its High Bandwidth Memory capacity for this year has been fully sold, with most of next year’s production capacity already booked. The tight supply environment and weak memory investments by major manufacturers should also give the company reasonably strong pricing power in the memory space. Micron expects its total bit share from HBM to be equivalent to its overall DRAM bit shares sometime in the calendar year 2025.

Looking at a slightly longer period, MU stock has seen extremely strong gains of 45% from levels of $75 in early January 2021 to around $110 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in MU stock has been far from consistent. Returns for the stock were 24% in 2021, -46% in 2022, and 71% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that MU underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MU face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

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There are some other positives for Micron. The trend of requiring higher quantities of DRAM could accelerate as AI moves from servers to terminal devices such as smartphones and PCs. We also expect Micron’s margins to see a slight recovery. The company has guided gross margins of about 25.5% for Q3 FY’24, up from 18.5% in Q2. Micron’s valuation is also not unreasonable, with the stock trading at about 15x consensus FY’25 earnings. That said, there are also concerns about the global economy, amid high interest rates and relatively stubborn inflation, which could weigh on consumer electronics sales. There is also a possibility that Micron will not have sufficient capacity to meet the surge in AI-related demand, given the company’s muted capital spending in recent years. We currently have a $101 price estimate for Micron stock, which is about 10% below the current market price. See our analysis of Micron’s valuation: Expensive or cheap for more details.

Returns Mar 2024
MTD [1]
YTD [1]
Total [2]
 MU Return 22% 29% 403%
 S&P 500 Return 3% 10% 134%
 Trefis Reinforced Value Portfolio 1% 6% 651%

[1] Returns as of 3/23/2024
[2] Cumulative total returns since the end of 2016

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