Micron may prove to be a solid pick in the coming months.
Micron Technology (MU -2.86%) stock surged nearly 80% in early 2024 and reached an all-time high of $153.14 on solid adoption of its high-performance memory products in the data economy. Despite this success, the stock is currently down by almost 32% from those highs.
Investors were disappointed with the company’s fiscal 2024 third-quarter results (ended May 30), especially AI sales which fell short of lofty expectations. Furthermore, geopolitical and supply chain challenges plaguing the overall semiconductor industry also did not help overall investor sentiment for Micron.
The difficult days, however, may now become a thing of the past. Micron came out with impressive results for its fiscal 2024’s fourth quarter (ended Aug. 29) in late September, with revenue and earnings beating analysts’ estimates. The company has been a major beneficiary of the explosive demand for memory and data storage products in various applications such as high-performance computing, autonomous driving, data analytics, and complex AI models.
This is evident considering that the company’s high-margin high-bandwidth memory (HBM) chip inventory (a type of dynamic random access memory or DRAM chip) is already sold out until 2025.
Wall Street is also optimistic about Micron. For the 44 analysts covering Micron stock, the median target price is $145.96, implying an upside of 40% from here. This seems to be a plausible target, considering the many strengths of Micron stock. Here’s why Micron is well poised to surge in the coming months.
Increasing memory demand at data centers
Data center server unit shipments are expected to grow in 2024, driven by increasing demand for AI and traditional servers. Data centers are also expected to replace multiple older-generation servers with fewer latest-generation traditional servers for performance improvements, higher power efficiency, and better space management.
Plus, DRAM and NAND content in conventional and AI servers is rising to meet the memory demands of complex applications in areas such as cloud computing, artificial intelligence, and 5G connectivity. All these trends bode extremely well for Micron’s memory offerings.
Micron has been at the forefront of leveraging this growing opportunity. The company is investing capital in the advanced one-beta DRAM node technology as well as G8/G9 NAND process technology to increase the production capacity of its high-margin DRAM offerings, including Double Data Rate 5 (DDR5), Low Power Double Data Rate 5 (LPDDR5), and HBM chips, as well as advanced NAND chips.
Furthermore, Micron is working on the next-generation 1-gamma DRAM production technology that uses extreme ultraviolet lithography and expects to use it for volume production in 2025. The company’s investments in transitioning from older nodes to advanced nodes and AI-powered smart manufacturing capabilities have helped boost yields for its high-performance memory chips.
Micron now expects its HBM, DDR5, and LPDDR5 offerings, and data center SSDs (solid-state drives use NAND flash memory) to rake in multiple billions of dollars in revenue in fiscal 2025.
The technological superiority of HBM chips
Micron estimates the global HBM market to grow from $4 billion in 2023 to more than $25 billion in 2025. The company is targeting almost 20% to 25% share of the HBM market by 2025. While a relatively small target market, HBM chips are expensive, bringing in more profits for Micron. With Micron, SK Hynix, and Samsung being the only three major memory manufacturers targeting the HBM market, these chips enjoy significant pricing power.
Micron has also succeeded in developing technologically superior HBM chips. The company’s 12-high (12-high implies 12 memory layers are stacked together in the chip) output HBM3E chips consume almost 20% less power while providing 50% more DRAM capacity than the competitors’ 8-high output HBM3E chips. This is a major advantage since processors and DRAM chips account for a significant portion of the power consumption at data centers.
Micron has inked long-term agreements with customers for its HBM chips, and has already concluded pricing for calendar 2024 and 2025. This has resulted in impressive revenue visibility for its HBM business. The company has already earned several hundred million dollars of HBM revenue in the fourth quarter of fiscal 2024.
Furthermore, Micron is also developing next-generation HBM chips, including HBM4 and HBM4E. Since HBM4 technology will offer customization capabilities, these offerings can also differentiate Micron in the mass-produced memory market.
Robust financials
Micron has reported robust results in fiscal 2024, with revenue growing 62% year over year to $25.1 billion and the gross margin growing 31 percentage points year over year to 23.7%. The company also reported a non-GAAP net income of $1.47 billion in fiscal 2024, a dramatic improvement from a $4.86 billion loss in the previous year.
The company also boasts a strong balance sheet with $9.2 billion in cash and investments and $13.4 billion in total debt.
Reasonable valuation
Micron has resumed its share repurchase program (which was suspended two years ago) in light of improving industry conditions. The company repurchased $300 million worth of shares in the fourth quarter.
Despite the many strengths and improving financials, the stock is trading at 4.6 times sales, far lower than the majority of semiconductor players. With Micron now working on differentiating its memory offerings coupled with a dramatic rise in demand, the company can surge significantly higher in the coming months.