Summary

• Micron delivered a strong earnings report in June, led by robust demand for AI HBM chips, which are expected to generate $700 million in 2024 sales.
• However, shares have corrected significantly in recent weeks and months on fears Micron will end up increasing inventory.
• DRAM’s HBM components are the heart of the bull thesis for Micron. The company’s product is sold out for 2025.
• Samsung Electronics possibly passing the Nvidia’s test is a risk that is now priced into the stock, which leaves a low bar for Micron.
• Micron shares are attractively valued at current levels and the upcoming earnings report could serve as a catalyst for the return near record highs.

Micron Technology (NASDAQ:MU) was one of the best performers in the first half of 2024. However, this popular chip stock has created a near-term peak in June, before falling more than 40% over the course of July and August. The question arises– is now the time to buy a dip in Micron stock? 

Two main reasons why I remain bullish on Micron stock are: The exposure to the rapidly-growing AI market, and the upturn that is taking place in the DRAM (dynamic random access memory) market. On the latter, the DRAM pricing is rebounding, which should help Micron’s profits and margins. 

Strong Visibility as AI Sales Pick Up

Back in June, Micron reported a strong set of quarterly results, thanks to the robust demand for its AI-focused memory chips. The company reported Q3 earnings and revenue that surpassed consensus estimates with adjusted earnings of 62 cents per share, which exceeded the expected 51 cents. 

Revenue also topped forecasts, coming in at $6.81 billion against the anticipated $6.67 billion. For this quarter, Micron has projected adjusted earnings of $1.08 per share on revenue of $7.6 billion for the current quarter. Wall Street was looking for earnings per share of $1.05.

The company reported a net income of $332 million, or 30 cents per share, a substantial improvement from the net loss of $1.9 billion, or $1.73 per share, seen in the same quarter of the previous year. 

This pickup in demand is largely attributed to the AI boom, with the company's advanced memory playing a crucial role in GPU server hosting, mainly in data center chipsets produced by Nvidia (NASDAQ:NVDA). On the other hand, Micron continues to struggle in the smartphone and PC markets amid a global slowdown in demand. 

In my opinion, one of the key factors underpinning the bull thesis on Micron stock are the expected price increases for popular products, such is the HBM3E – which is the fastest, highest-capacity high-bandwidth memory product Micron is offering. 

The company’s data center business, in particular, has experienced a 50% growth in the quarter-to-quarter comparison. Micron said that its high bandwidth memory (HBM) chips are already sold through 2025 as the company now works on 2026 bookings. 

"We believe that Micron will be one of the biggest beneficiaries in the semiconductor industry in the multiyear growth opportunity driven by AI."

It’s All About HBM

HBM is known for its vertically stacked chips, which not only save space but also significantly reduce power consumption. As such, it is increasingly becoming vital for handling the demanding workloads of generative AI.
 

HBM plays an important role in the performance of GPUs, which are at the heart of processing the vast amounts of data generated by complex AI tasks. The efficient design of HBM allows it to support these GPUs in rapidly managing and transferring data.

According to TrendForce, the HBM demand growth rate in 2024 is near 200% and is set to double in 2025. As a result, the HBM market is expected to see a major increase in both capacity and market value within the DRAM sector.

The unit sales price of HBM is several times that of conventional DRAM and approximately five times higher than DDR5. With advancements in AI chip technology leading to larger single-device HBM capacities, HBM's share in the DRAM market is projected to skyrocket.

According to TrendForce, HBM's share of total DRAM bit capacity is expected to grow from 2% in 2023 to 5% in 2024, and it is anticipated to exceed 10% by 2025. This way, HBM is expected to represent over 20% of the total DRAM market value beginning in 2024, with the potential to surpass 30% by 2025. These are all factors that are benefiting Micron as the company is one of the three HBM producers globally. 

Despite robust demand, the estimates still show that the HBM is likely to remain in undersupply in 2025. I believe that this is a major tailwind for Micron, which is an Nvidia-certified HBM producer, with the company expected to keep rising prices for the product that remains scarce. 

The company’s management said on a recent earnings call that they forecast $700 million in HBM revenue for 2024, which is then set to grow more than 300% to about $3 billion in 2025. According to Micron, HBM DRAM is likely to  command a 6x pricing premium.

Valuation 

Based on 2025 estimates, Micron’s P/E ratio stands at just above 10, which is very attractive in my opinion. For instance, Citi’s price target on Micron is $175.00 and is based on 15X 2025 EPS estimates. While this is above Micron’s historical range, Citi believes this is justified given the company’s AI exposure. 

Micron stock price daily chart (Source: TradingView)

According to StreetInsider’s data, the average price target on Micron is $155.70, which signals an upside potential of about 75% from current levels. This makes Micron a compelling investment opportunity, especially bearing in mind the company’s AI exposure. 

Overall, the chart (attached above) shows a deep pullback in Micron stock. The stock price has found support in the $85 region, which suggests buyers are out there looking for a re-rate higher once the macroeconomic situation improves and Fed’s cutting cycle is underway. 

Risks

As is the case with any stock in the world, investing in Micron stock comes with certain risks. An oversupply could lead to inventory reductions and lower pricing, negatively affecting estimates  and Micron stock price. Pricing strategies are another critical factor for Micron, as any decrease in DRAM or NAND pricing by the company or its competitors might lead to a broader drop in contract or spot prices. 

Similarly, shifts in manufacturing capacity by Micron or its competitors could also impact the market. There are widespread reports that Samsung Electronics (SSNLF) is set to qualify as an HBM supplier for Nvidia, which is also likely to impact Micron. 

The memory market is highly competitive, with Micron vying for market share against major players such as Samsung, Toshiba (TOSBF), Western Digital (NASDAQ:WDC), and especially South Korea’s SK Hynix (HXSCF). Actually, it was reported recently that SK Hynix will start mass production of HBM3E 12-layer chips by the end of September. SK Hynix has been the main supplier of HBM chips to Nvidia.

Conclusion

Despite the dampening sentiment on AI chip stocks in recent weeks, I’m convinced Micron stock still offers a compelling investment opportunity. This is because of the DRAM upturn, which still remains intact and fueled by limited production growth and the proliferation of HBM– which, on the other hand, is widely expected to remain in undersupply during 2025.

Shares are especially attractive following the recent selloff, which saw Micron stock fall more than 40% from the recent June peak, which also marks a record high. Investors might benefit from using trading alerts or signals to stay informed about key market movements, especially with the upcoming earnings report, which is scheduled for September 25, potentially acting as a catalyst for the stock to rebound above $100.