This Is Not Your Father’s Micron Anymore

Benefiting tremendously from the AI boom, memory chip maker Micron (MU) is still valued as though it primarily develops products for use in the volatile, cyclical consumer electronics sector. Moreover, there’s evidence that the Street is finally internalizing this contradiction. Consequently, I advise investors to buy MU stock at this point.

Revenue From Data Centers is Soaring

On the chip maker’s fiscal first quarter earnings (November end) call, held in December, Chief Business Officer Sumit Sadana reported that the firm’s sales to data centers had jumped 400% in its fiscal Q1 versus the same period a year earlier. And with the company’s revenue from data centers accounting for more than half of its revenue during the quarter, it’s clear that this business is enabling MU to grow very rapidly overall. Indeed, its top line jumped to $8.7 billion in Q1 versus $4.7 billion during the same period a year earlier.

The firm’s sales to data centers are climbing very fast largely because of huge demand for its high bandwidth memory (HBM) chips. Demonstrating the latter point, Sadana noted on the Q1 call that its HBM offerings were now “a multi-billion dollar business.”

That point was highlighted by Laura Peters, senior executive editor for Manufacturing and Test, at Semiconductor Engineering, who wrote in November, “HBM is the memory of choice to store much of the data needed to create… large language models such as ChatGPT.”  

She added that “HBM inventories are sold out,” as efforts “to increase the density (of large language models) by adding more layers, along with the limits of SRAM scaling, are adding fuel to the fire.”

Given Peters’ points, along with the continued, rapid proliferation of large language models,I think it’s certain that MU, barring a deep macroeconomic recession,  will be able to sell as much HBM as it can produce for the foreseeable future. Supporting this thesis, MU predicts that the overall HBM market will soar to $16 billion in 2024 to over $100 billion in 2030.

The shares are up 3.1% in the last 12 months, outpacing the 2.4% gain clocked by VanEck Semiconductor ETF (SMH), which has MU stock at an 0.84% weighting.

Much Higher Profits Yet Still Being Valued as Dependent on Consumer Electronics

In Q1, MU’s net income came in at $1.87 billion, versus a loss of $1.23 billion during the same quarter a year earlier. 

Traditionally, Micron has relied a great deal on selling commoditized memory chips used in consumer electronics. And in past years, the latter business was characterized by boom-and-bust cycles. Typically, higher demand for these products would produce a boom which lasted until an oversupply of the chips triggered a bust. As a consequence, MU stock traditionally trades at very low valuations relative to many other chip makers.

At Friday’s $105.75 per share close, it is trading at 30.3 times trailing earnings, 14.1x its forward price-to-earnings, 4.1x sales and 2.52x its book value.

But because AI is booming, with few hurdles in its way, the demand for MU’s HBM is likely to keep expanding very quickly. And as HBM constitutes an ever-growing portion of its top and bottom lines, Micron’s financial results are probably going to keep improving rapidly (again, barring a deep macroeconomic recession), no matter what the consumer electronics sector does.  

Indeed, although the consumer electronics space is rather lackluster now (Global PC sales and smartphone sales rose about 1.5% and 2.5% year-over-year, respectively, last quarter), MU’s top and bottom lines, as I’ve shown, are soaring. 

Despite these points, the valuation of MU stock is still almost absurdly low. That 14.1x forward price-to-earnings ratio shows investors — and much of the Street — still appears to erroneously believe that MU’s fate is tied to the highly cyclical consumer electronics sector. But that situation may be changing.

On Jan. 6, Nvidia (NVDA) CEO Jensen Huang reported that MU’s HBM offerings were being utilized in NVDA’s new GeForce RTX 50 Blackwell gaming chips. The statement sparked a gain of over 10% by MU’s shares on the same day, and the name rose by another 2.5% on Jan. 7. Although MU subsequently pulled back along with the tech sector on the following Monday, the shares during the rest of the week of Jan. 13 jumped another 10%. 

As a result, I believe that Huang’s statement has caused the Big Money to become quite aware that MU is well-positioned to benefit from the AI boom. And the latter situation is likely to enable the shares to outperform the market for some time.

Disclaimer: At the time of writing, the author did not own any of the stocks mentioned in this article. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Larry Ramer is currently ranked 382 out of 30,536 financial bloggers analyzed by TipRanks, with a 13.2% return on his buy and sell ratings. He has been a long-time contributor to InvestorPlace, Seeking Alpha and Fintel.io. He is one of the founding contributors to this newsletter.

He focuses on contrary investing and specializes in the renewable energy and consumer discretionary sectors. Among his highly successful, contrarian picks have been Plug Power, Exxon Mobil, solar stocks, and airline stocks. On the downside, he was an early predictor of the collapse of cryptocurrencies, marijuana stocks, Ocugen, and Meta Platforms.