Summary

• Micron's stock consolidation presents a buying opportunity due to AI potential and low valuation, with reduced short-term uncertainty from Q3 updates.

• Q3 updates reveal lower gross margins driven by consumer product growth, but higher total revenue and earnings can be expected.

• Micron's long-term potential remains strong, driven by AI infrastructure investments and HBM products.

• Despite risks, Micron's current valuation is low, offering a solid margin of safety and a Strong Buy rating with a potential 20-50% upside.

Micron Technology's stock has been moving sideways in the last seven months, seemingly dropping on every piece of news but then recovering slowly. Since the general long-term thesis remains bullish for Micron, this period of prolonged consolidation seems like a good time to accumulate a bigger position in the stock. Continuing AI spend from big players and Micron's low valuation are still strong enough reasons to buy the stock. And with the recent updates, which cleared uncertainty regarding MU's short- to medium-term future, the next growth cycle might come soon.

The company's updates for FQ3 reduce short-term uncertainty

During the recent Wolfe conference, Micron provided important updates on its potential FQ3 performance and cleared any uncertainty that could have remained for the upcoming FQ2. On the latter, the company expects no change or update, which means Micron is sticking to its previous guidance. As a reminder, the corporation expects around $7.9 billion in revenue and $1.43 in non-GAAP EPS. This would lead to a 36% and a 240% increase year-over-year, respectively.

For FQ3, important updates include margin development, revenue mix, and competition.

Starting with margins, the general headline might sound negative from the first glance — the company expects its FQ3 gross margin "a few" percentage points lower sequentially. Since Micron guided for about 37.5-39.5% gross margin in FQ2, FQ3 gross margin should then be around 35%.

However, reading Micron management's entire message, it turns out this lower gross margin is primarily driven by stronger-than-expected consumer-oriented growth in the quarter, namely for PC and smartphone products. These product lines are generally associated with lower margins, compared to other segments, like data center. Therefore, with more revenue coming from consumer-related products in FQ3, MU's total gross margin will be "diluted" to a lower number.

Since the company confirmed general strength and continued growth in other segments, the commentary about consumer-related strength means MU's total revenue might be significantly higher in FQ3 than originally expected. Therefore, even with this lower gross margin, Micron's earnings are likely to get a boost in FQ3 thanks to the higher total revenue base. The company did also mention that the underutilization in NAND impacts margins as well, but from what I understand, this impact is not significant. NAND is also expected to return to normal over time thanks to supply reductions.

Another positive signal regarding the revenue mix is Micron's commentary on client and smartphone inventory levels. Mark Murphy, Micron's CFO, mentioned that the company now expects the inventory there to clear "by spring," with a significant content uplift of about 50% for "AI-related" devices. These likely include smartphones with intelligence features like Google's (GOOG) Pixel phones, Samsung's (OTCPK:SSNLF) Galaxy devices, and PCs with Microsoft's (MSFT) Copilot. On the latter, Micron mentioned the Windows update to be a significant driver for sales at the end of 2025, as Microsoft ends support for Windows 10 in October this year. These developments in the consumer market are a big positive for MU, as the stock's post-FQ1 drop was primarily driven by the weakness in this segment.

Additionally, what I found interesting from this conference was Micron's commentary regarding its HBM efforts and Samsung's potential success in this market.

Micron's HBM memory has been sold out for 2025 since last year, and the company expects this trend to continue as they ramp up the production of the 12-stack HBM, which is a new product claimed to be "20% less power at 50% more capacity." HBM4 also appears on track for 2026.

Regarding Samsung, it is reassuring that Micron's "base-case" scenario is that Samsung will succeed in properly entering the market. Currently, Samsung trails behind SK Hynix and Micron in HBM, despite the fact that the former has so far been very successful in other memory segments. Still, with this potential new rival in HBM, Mark Murphy claims their technology and position in the market should allow Micron to retain significant market share there.

Clearly, most of the updates the company gave during the conference are just commentary at this point, and we need to see how it will all play out in reality. However, in general, I see a lot of short- to medium-term uncertainty being reduced after these updates, which should help the stock continue its uptrend from the current consolidation.

Micron will continue to profit from AI infrastructure spend, thus breaking the usual cyclicality

When it comes to Micron's long-term potential, the situation remains favorable, in my opinion. In the latest quarter, Micron generated 55% of its revenue from the data center and networking segment, up from 20% a year ago. Since the AI and data infrastructure investments are expected to continue expanding in the near future, Micron's sales should keep growing as well, which is likely to break the usual memory cyclicality patterns.

Micron's HBM products should be a significant revenue driver here. The company mentioned they expect HBM's TAM to reach more than $100 billion by 2030. With about 20-25% market share targeted by the company, this segment alone could bring $20-25 billion annually in just 4 years.

We did put out some markers on, for example, the size of HBM and going from $16 billion TAM last year to over $100 billion by 2030. So those are big new markets. And then, you’ve got a number of associated other product lines that will grow sort of in that manner as well.

In the consumer market, Micron is likely to benefit from the fact that the share of AI-powered smartphones is expected to increase from 16% in 2024 to 54% in 2028. These devices require increased amounts of memory to operate, thus increasing potential content for MU, which explains the revenue mix update we discussed above. Again, these developments should clear the post-FQ1 negativity, as the drop in the stock price was primarily driven by the consumer segment's weakness.

Micron's valuation remains low in light of strong growth and higher certainty

Despite the improved certainty in FY2025 and its promising future beyond that, Micron continues to be valued surprisingly low, even for this cyclical company. MU's EV/EBITDA is consolidating around 6-7, way lower than FY2024's average of 12-14.

Data by YCharts

The company is also valued substantially lower compared to most other semiconductor peers. MU's PEG ratio, which shows P/E relative to earnings growth, is dismal 0.38, way lower than the "normal" level of 1.

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Sure, Micron is a cyclical company and will likely be valued lower than some of its peers with a more stable growth, like Nvidia (NVDA), Texas Instruments (TXN), or AMD (AMD). However, Micron is currently only at the beginning of its unprecedented upcycle, which might remain for longer than usual thanks to the continuing AI infrastructure spend by the big players. In light of that, the current valuation seems unusually low.

Additionally, Seeking Alpha Quant gives MU a Hold rating. The stock has exceptionally strong ratings for key aspects like valuation, growth, and profitability. If MU gains some momentum after the current period of consolidation, the rating should quickly change to Buy or Strong Buy.

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DCF update

To further understand the intrinsic value of MU, we can use a DCF analysis. In light of the latest updates and data, I have adjusted the assumptions slightly compared to my previous article, but the model remains the same. A quick note on the changes:

• The expected revenue growth for FY2025 was lowered to 39% to better reflect Micron's own estimates. Revenue growth assumption for FY2026 was increased to 28%, based on analysts' estimates.

• The risk-free return rate used in WACC to discount cash flows was increased to 4%, as the US 10-year treasury yield has grown over the last months due to lower number of rate cuts expected in 2025. From here, the WACC is estimated to be 12.9%, with a 1.18 beta and 9% market premium I use in my analysis.

• Balance sheet numbers were adjusted based on the latest report.

Here is the operating and balance sheet data and assumptions used in the model:

The author's DCF model

From here, the current fair price range for MU is about $111-124, about 17% higher than the current level. The price target for the end of FY2025 (Micron's financial year ends in August) is about $125.

The margin of safety is not the highest I've seen for Micron, but still substantial. The model also uses relatively conservative assumptions for revenue growth and the risk-free rate. Taking a more bullish approach with higher-end revenue estimates and a risk-free rate of 3%, the fair stock price can be around $134-150.

This price range would be in-line with the recent price target of $150 set by Citi, who also reiterated Buy rating after Micron's aforementioned Q3 update. Generally, MU's Wall Street average price target is $130 at the moment, representing a 31% upside.

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Risks and key takeaways

As usual, a significant margin of safety does not necessarily mean the stock will reach its fair value any time soon. In the case of Micron, the company's future depends on continued trends in the data center and consumer markets.

Even though the tech giants have expressed their plans to spend heavily on AI infrastructure, changes in the economy like higher inflation or significant breakthroughs similar to the recent DeepSeek (DEEPSEEK) situation could lead to quick changes in these plans. Moreover, as a production-heavy company, Micron still needs to invest a lot of resources in new facilities and processes, like the ramp up of the HBM4 and 4E technologies, expected around 2026. These investments are risky and might require a long time to be paid off, and Micron already has a substantial amount of long-term debt on its balance sheet, around $13.2 billion. Additionally, potential success of competitors like Samsung in high-margin markets like HBM memory might still lead to detrimental effects on Micron, even if the management expresses their confidence at the moment.

However, despite all these risks, the current consolidation in the stock price seems like another great opportunity to build a position in MU. Micron should profit significantly in the long run from the continued trends, especially when it comes to the AI technology, and the recent updates regarding FQ2 and FQ3 resolve uncertainty in the short- to medium-term. Therefore, with a solid margin of safety of about 25-30%, the stock remains a Strong Buy.