What’s Happening With Micron Stock?

Micron Technology (NASDAQ: MU) stock has seen considerable volatility this year, rising by about 85% through mid-June, although it has fallen by close to 40% since then, taking its year-to-date returns to about 8%. There are a couple of factors impacting Micron stock.

Micron has been benefiting from a recovery in the memory market, with the price for DRAM chips picking up after seeing a big decline following Covid-19. For instance, Trendforce forecasts that server-side DRAM memory prices could rise by as much as 13% sequentially over Q3, while PC memory could rise by about 8%. The growth is being driven by lower recent capital spending by the DRAM producers, as well as higher demand from the generative AI space. Micron also recently posted a better-than-expected set of Q3 FY’24 results, with revenue rising to $6.81 billion, up from $3.75 billion in the year-ago period, while adjusted earnings came in at $0.62 per diluted share. However, Micron’s guidance for Q4, which projects earnings of between $1 and $1.16 per share on an adjusted basis, was only in line with consensus and this appears to have contributed in part to a sell-off.

That said, Micron appears to be a solid play on the generative AI space. Generative AI models require considerable storage, driving demand for DRAM products. Moreover, faster memory is also required to run large language models efficiently and this is driving demand for High Bandwidth Memory (HBM). Manufacturers of GPUs, which are widely used for AI workloads, are integrating more memory into their systems. For example, Nvidia’s latest Blackwell AI systems feature a 33% increase in HBM3E content. However, supply is likely to be a constraint as HBM memory uses about three times more wafers compared to fifth-generation DRAM to produce the same amount of bits at the same technology node. Micron indicated a few months ago that its HBM capacity for 2024 was completely sold, with most of its HBM supply already allocated for 2025 as well.  This should result in stronger DRAM pricing for Micron and the broader industry. The generative AI trend is likely to drive higher demand from the client side of the market as well, as customers opt for more high-end PCs and smartphones with AI capabilities.

Now, the turnaround in the memory markets and the surging interest in AI have meant that MU stock has seen gains of 20% from levels of $75 in early January 2021 to around $92 now. This compares to an increase of about 40% for the S&P 500 over this roughly 3-year period. In contrast, Arista Networks (NYSE:ANET), a company that also benefits from generative AI, has seen its stock surge by more than 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which 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. Now, coming back to MU stock, can it outperform going forward?

Micron’s valuation is not unreasonable, with the stock trading at about 10x 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 $114 price estimate for Micron stock, which is about 22% ahead of the current market price. See our analysis of Micron’s valuation: Expensive or cheap for more details. We will be revisiting our price estimate for Micron following Q3 results.

[1] Returns as of 8/9/2024
[2] Cumulative total returns since the end of 2016

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