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Is Micron Technology Stock Still a Buy Near Its All-Time High?

Motley Fool - Thu Apr 18, 4:23AM CDT

Since the advent of generative AI a little more than a year ago, Micron Technology(NASDAQ: MU) has been in the spotlight. Excitement regarding Micron's future prospects has fueled impressive gains of 94% over the past year (as of this writing), putting the stock within striking distance of yet another all-time high.

The company is a leading supplier of memory (DRAM) and storage (NAND) chips that are essential components in AI processing, making it a beneficiary of these ongoing secular tailwinds.

This leaves investors with a dilemma. After notching 143% gains in roughly 15 months, is Micron Technology stock still a buy? Let's look to see what the evidence reveals.

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Image source: Getty Images.

How Micron Technology rode the AI trend higher

Micron's claim to AI fame is that its storage and memory chips are deeply integrated with the graphics processing units (GPUs) that enable generative AI. Nvidia's GPUs are already the gold standard, but Micron is working make them even speedier.

Late last year, Nvidia announced that its Hopper H200 Tensor Core GPU would be powered by Micron's HBM3E (High Bandwidth Memory 3E), providing "advanced memory to handle massive amounts of data for generative AI and high-performance computing (HPC) workloads," according to the press release. Nvidia also said the HBM3E helped generate "nearly double the capacity and 2.4 times more bandwidth compared with its predecessor, the Nvidia A100."

Nvidia's AI-centric data center processors are expected to begin shipping in the second quarter. In late February, Micron announced it had commenced volume production of the HBM3E, which offers "superior performance" while using about 30% less power than rival offerings. However, just weeks later, management made a surprising announcement, revealing that its HBM3E was "sold out for calendar 2024, and the overwhelming majority of our 2025 supply has already been allocated."

This helps illustrate the strong demand for Micron's components, which is onlyo expected to increase from here.

Micron Technology's growth is impressive

The aforementioned rapid adoption of AI has fueled Micron's growth. For its fiscal 2024 second quarter (ended Feb. 29), Micron generated revenue of $5.82 billion, which climbed 58% year over year and 23% sequentially. The company pointed to surging demand, which "drove robust price increases." This helped Micron return to profitability quicker than predicted, delivering adjusted earnings per share (EPS) of $0.42.

Management is calling for its growth spurt to accelerate. In the third quarter, Micron is forecasting revenue of $6.6 billion, which would represent growth of 76% year over year. its adjusted EPS is expected to climb to $0.45 compared to a loss in the prior-year quarter.

One of the main drivers fueling the stunning demand is the rush to upgrade data centers to meet the computational rigors of AI processing. Bernstein analyst Toni Sacconaghi estimates the AI server market will grow at 75% annually over the next three years, causing the server market to double -- which he called "a historically unprecedented level of growth."

While the current demand is limited to servers, AI is eventually expected to spread to personal devices, including desktops, laptops, notebooks, and even smartphones, which would spark strong demand for Micron's other storage and memory chips.

How vast is the opportunity?

It's only been a little more than a year since generative AI took the world by storm, yet adoption has only just begun. Companies are intrigued by generative AI, which can automate tedious and time-consuming tasks, thereby increasing productivity and saving money. And it seems new potential applications are being examined every day.

Experts are scrambling to estimate the potential size of the AI market, but no one really knows for sure. One of the more moderate views suggests the technology could generate economic value of between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company.

When viewed in the context of Micron's impressive growth and the opportunity ahead, the stock is still attractively priced, selling for roughly 4 times next year's sales.

History suggests the current growth surge has limits, particularly for a cyclical chip company like Micron. That said, the adoption of generative AI is expected to go on for years, if not a decade or more, which makes Micron a compelling opportunity -- even as the stock sits near an all-time high.

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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

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