Key Points
Micron sells the memory and storage that are essential for AI to function.
A shortage of supply has helped memory prices soar in recent months.
Micron Technology (NASDAQ:MU) has been a clear winner in the artificial intelligence (AI) boom in recent quarters. The company sells the memory power and storage that are crucial elements as AI is applied to real-world situations, and demand has soared.
This has translated into explosive revenue growth and high profitability on sales, and the latest earnings report reinforced this trend. Last week, in the fiscal fourth-quarter report, Micron said revenue surged more than 300% to $54 billion, and gross margin topped 86%. Investors have recognized this AI strength and piled into the stock, pushing it to a gain of more than 270% this year.
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Of course, amid general concerns about a potential slowdown in AI spending and the possibility of additional interest rate hikes to tame inflation, some investors now hesitate to get in on high-growth AI stocks. So, you might be wondering: Is it too late to buy Micron? Or is the stock a buy after the company's latest explosive earnings report? Let's consider the bull and bear cases.
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The bull case for Micron
As mentioned, Micron's earnings growth has taken off in recent quarters, driven by the need for memory and storage in the AI market. In fact, demand has been so strong that it's led to a shortage of supply, and memory prices have surged. So, though Micron faces competition, there's plenty of business for all of the top players.
Micron has even put into place strategic customer agreements (SCAs) that offer it visibility on revenue ahead; the company says it has signed SCAs that reach into 2031. This ensures supply to the customer and a certain level of revenue for Micron.
It's also important to keep in mind that AI is just starting to be used by companies to address their problems and needs, and this suggests we're in the early stages of the growth story. Memory and storage are essential in the processes of agentic AI, or the use of AI to take steps on behalf of humans. All of this means that Micron earnings could continue to soar, and the stock price may follow.
The bear case for Micron
Micron and rivals are addressing the memory shortage and ramping up production, and as supply comes online, this could lead to a decline in prices. Morningstar analysts predict memory supply will double by 2028, and this will push prices lower over the following three years. This could make Micron less profitable on sales and weigh on growth.
Meanwhile, any potential slowdown in the AI infrastructure build-out may significantly hurt Micron's revenue and demand for the stock price. So far, the need for memory remains high, and tech giants aim to spend nearly $700 billion this year alone on infrastructure. But investors have questioned whether this pace will continue into the coming years. This is a risk for Micron as well as other chip players.
Though Micron isn't particularly expensive from a valuation perspective, trading at 6x forward earnings estimates, investors, seeing its tremendous gains in recent times, may focus on the risks I've talked about here and prefer to turn to an AI stock that's earlier in its growth story.
Should you buy Micron?
The Micron story right now looks bright, and the stock may have more fuel in the tank over the coming year. However, it's possible we'll see a pullback at some point, or even stagnation, as memory supply strengthens.
Your decision about whether to invest right now depends on your comfort with risk. Aggressive investors may pick up Micron shares today and benefit as this growth story continues, but cautious investors might prefer to buy on an eventual dip further down the road.
The memory business has always been cyclical, with growth that ebbs and flows, and this may continue even if this AI-driven cycle is longer. Micron may not be a buy for every investor today, but the company is well-positioned to win over the long term, even if it must first traverse a slowdown. And this makes it a stock all investors should at least keep on their radar screens.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.