Memory Chip Behemoth Micron: A Futuristic Fantasy or Bursting Bubble?
Memory chip juggernaut Micron Technology has been riding a red-hot streak, with its stock soaring to dizzying heights. Boasting a remarkable 48% surge in 2024 and an eye-watering 93% leap over the past 52 weeks, Micron’s success has been nothing short of meteoric. The catalyst behind this financial fireworks display? The explosive growth of the artificial intelligence (AI) sector, propelling Micron to unprecedented levels. As AI systems increasingly rely on copious amounts of memory and solid-state storage, Micron, a dominant chip supplier, finds itself in a lucrative position, much to the delight of its investors.
Veteran shareholders are basking in sensational long-term gains, the stock outpacing the S&P 500 returns by over 100% in the last decade. The question on everyone’s minds now is – Is it too late to hop on the Micron bandwagon?
Explosive Growth Awaits Micron in the Short-Term
The demand for Micron’s cutting-edge products remains robust.
The realm of advanced AI systems demands substantial number-crunching power, fueling the need for vast quantities of short-term DRAM chips. These systems also depend heavily on swift and efficient long-term storage, invariably turning to NAND chips, also referred to as flash memory or solid-state devices (SSDs).
Micron, heralded for its memory chip prowess, basks in its innovation superiority. Boasting unmatched performance per watt, Micron’s latest high-bandwidth memory solution is highly sought after by manufacturers of massive systems, with industry luminary Nvidia selecting this memory variant as the gold standard built-in DRAM for its cutting-edge AI accelerators.
The average spot price for mass-market DRAM chips has surged by 11% year to date, while NAND chip prices remain stable in 2024. To sweeten the deal, market leader Samsung anticipates a 20% hike in NAND chip prices in the upcoming quarter. Leveraging its technological edge, Micron is poised to outstrip these price increments.
With a rosy outlook for Micron’s future growth, the horizon appears bright for the memory chip giant, undeterred by potential competitors attempting to close the performance gap in the long run.
Troubling Signs of Overvaluation Loom Over Micron’s Stock
However, a cloud of uncertainty hovers over Micron’s valuation.
Despite the bullish market sentiment, the memory industry recently rebounded from a severe downturn. Consequently, Micron’s trailing sales plummeted by 43% since the summer of 2022, and its free cash flows plunged into negative territory:
MU Revenue (TTM) data by YCharts
Traditional valuation metrics falter when earnings and cash flows are in the red. Yet, the familiar price-to-sales ratio mirrors levels reminiscent of the dot-com bubble era.
Parting Words: Opt for a Safer Bet?
As an ardent Micron supporter, even I find the current scenario disconcerting.
While the cyclical nature of the memory industry is no secret, the unprecedented surge in Micron’s valuation demands a reassessment. Investing in Micron at this juncture seems warranted only if you anticipate structural shifts within the memory chip sector as a whole. Micron must maintain its technological superiority in the long haul, alongside a soaring demand for premium memory solutions to justify its lofty valuation.
Considering the risks, I am contemplating cashing in on some Micron profits and redirecting funds towards more reasonably priced growth stocks or a stable index-tracking exchange-traded fund (ETF). The lure of Micron’s possible rocket ride still tugs, but a conservative stance might just be the prudent move for a peaceful night’s sleep in this richly valued stock market.
Concluding Thoughts on Micron Technology Stock
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Anders Bylund has positions in Micron Technology and Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.