Micron shares upbeat outlook, defies analyst expectations. Is the stock a buy now?

Actions of Micron technology (MU -2.17%) rose after the company reported strong results and provided upbeat guidance. Ironically, more than half a dozen Wall Street analysts cut their price targets in the weeks leading up to its earnings report, with many now scrambling to raise their targets following its results.

With the stock up more than 25% on the year, let’s see if it’s too late to buy Micron stock, or if this could just be the beginning of its rise.

High bandwidth memory a big opportunity

Like many other chipmakers, Micron is also seeing a boost from rising demand for artificial intelligence (AI) infrastructure development as the company posted record data center revenue in fiscal 2024.

An emerging growth area is its high-bandwidth memory (HBM) chips, which help reduce power consumption and improve the performance of AI chipsets. Its newest HBM3E chip is used in Nvidiahis (NASDAQ: NVDA) H200 processors and will also be used with its new Blackwell chipsets.

The company said it posted HBM revenue of “several hundred million dollars” last fiscal year and expects “several billion dollars in HBM revenue in fiscal ’25.” It said the total addressable market (TAM) for HBM has grown from $4 billion in 2023 to more than $25 billion in 2025. It noted that its HBM production is depleted for both the 2024 and 2025 calendars .

Overall, for the fiscal third quarter, Micron posted a 93% increase in revenue to $7.8 billion. Dynamic Random Access Memory (DRAM) revenue was up 93% to $5.3 billion, NAND revenue was up 96% to $2.4 billion, and other revenue was $59 million, up 18%.

By segment, computing and networking revenue rose 152% to $3 billion, while storage revenue rose 127% to $1.7 billion. Mobile revenue increased 55% to $1.9 billion, while embedded revenue increased 36% to $1.2 billion. Adjusted earnings per share (EPS) were $1.18, compared with a loss of $1.07 a year ago. That was well ahead of the $1.11 adjusted EPS that analysts were expecting.

Looking ahead, Micron indicated fiscal Q1 revenue to be between $8.5 billion and $8.9 billion, with gross margins between 38.5% and 40.5%. It seeks adjusted EPS of $1.66 to $1.82. Analysts were looking for adjusted EPS of $1.52 on revenue of $8.27 billion.

After spending $8.1 billion in capital expenditures (capex) in fiscal 2024, the company said it expects that amount to be significantly higher in fiscal 2025. Unlike many chipmakers today , Micron does much of its own chip manufacturing and builds new fabs (chip manufacturing). facilities) in New York and Idaho. Its increased capex will also go towards investing in HBM chips.

Image source: Getty Images.

Is it too late to buy Micron stock?

Micron is enjoying strong growth from AI infrastructure development and sees huge potential in its HBM chips. However, it is worth noting that it is not the only HBM supplier. South Korea’s SK Hynix is ​​the main supplier of these chips to Nvidia. Samsung also makes HBM chips, but has had some technological issues with them.

It’s also worth noting that while Micron makes its own chips, SK Hynix uses Taiwan Semiconductor Manufacturingor TSMC for short, to produce their chips. Given that Nvidia likely needs as many HBM chips as possible, and that Micron is not taking up capacity at TSMC’s fabs, it should remain a strong second-source supplier for Nvidia in this area.

From a valuation perspective, Micron stock looks pretty cheap, trading at a forward-to-earnings (P/E) multiple of just over 12, based on analyst estimates of $9.05 for the current fiscal year. It would not be surprising to see these estimates rise in the coming days and weeks after strong fiscal Q1 guidance.

However, a company like Micron will trade at a much lower multiple than chip companies like Nvidia or Arm holds as both DRAM and NAND memory tend to be highly cyclic in nature. There are still some concerns that DRAM inventory is too high in areas such as smartphones and computers, and that this will eventually drive prices down. So Micron’s performance over the next year could very much depend on how big the hardware refresh cycle is due to AI, and whether it can absorb that supply to stabilize prices.

While the HBM opportunity is real and likely to continue to grow, concerns about oversupply and DRAM prices are also real. As such, I’d continue to hold the stock, but I wouldn’t rush to buy it after this jump. I would continue to monitor the comments regarding DRAM pricing and supply.