Micron Technology (MU, Financial) is proving to be a fantastic investment as it is set to lead the artificial intelligence (AI) driven memory market. AI is one of the major growth engines of the semiconductor industry and in growing areas such as dynamic random access memory (DRAM) and high-bandwidth memory (HBM), Micron is in an ideal place to capitalize on these growing trends. Its HBM chips are even used by Nvidia Corp (NVDA, Financial) in its newest AI and gaming solutions, solidifying its position as a market leader.

• Warning! GuruFocus has detected 3 Warning Sign with MU.

Although Micron's stock price recently fell due to a conservative second-quarter outlook, the company's fundamentals remain noteworthy. Sales from the data center now contribute to more than 50% of the revenues and the core focus of the company on innovation is creating a path for growth in fiscal 2025. On top of this, it has an attractive valuation than many of its peers, which makes it clear why it's an ideal time to invest in the stock.

Company overview

Micron Technology is a global manufacturer of memory and storage solutions. The company develops and produces DRAM, NAND flash memory, and SSD solutions for industries such as data centers, automotive, and mobile. Because Micron is the only manufacturer of memory in the United States, the company assumes great responsibility for driving innovation and leading technology advancement globally.

Micron's AI-driven memory market opportunity

In 2025, the memory market will show record levels of growth, and the star of the show will be AI. Gartner predicts that the market for DRAM could grow by as much as 28% this year to $115.6 billion due to increased demand for HBM. These chips are being used in AI accelerators as they help to increase the data processing rate and increase computational power.

Micron is actually ahead of the game here. It has been able to leapfrog over larger rivals such as Samsung Electronics (SSNLF, Financial) to claim a critical position in Nvidia's market. For instance, Micron's HBM chips powers Nvidia's upcoming GeForce RTX 50 series of gaming and AI cards. Also, Micron's fastest HBM will be incorporated into Nvidia's Grace server CPUs and the next-generation Blackwell AI systems. That's massive, particularly when you take into account that Samsung is reportedly having a difficult time getting its chips green-lit by Nvidia.

More interesting is how it all fits into the broader picture, especially in the case of Micron. The company estimates the HBM market size will grow from $16 billion in 2024 to over $100 billion by 2030. Add that to Micron's Q1 2025 and the foundation is laid for some big advancement.

For anyone watching the AI boom roll, Micron seems like a safe play. They have the technology, the partnerships, and market tailwinds on their side. If this AI trend continues to grow, then Micron's capability to capture that demand could turn this into a standout year for the company.

Micron's financial flexibility and strong start to fiscal 2025

Micron stands out in terms of financial flexibility, putting itself in a very good position to remain agile. The company's cash-to-debt ratio has fallen sharply from its historical highs to 0.53. The shift underscores the company's push to make aggressive investments in AI memory and other growth areas. The total debt of the company is $14.4 billion, which can be considered rather low, being only 13% of the firm's market capitalization. This is a clear indication of how manageable its leverage is. Also, Micron has a $7.6 billion cash reserve that gives it enough liquidity to invest in the right areas. Its cash-to-debt ratio, while lower, is consistent with Micron's focus on very high growth markets and its investments

As for Micron's solid start to fiscal 2025, the latest first-quarter results are stunning as the company exceeded the profit projections. The chip-maker posted earnings of $1.79 per share, a figure that surpassed the $1.76 per share estimated by Wall Street.

On the revenue front, Micron achieved $8.7 billion in net sales, up a whopping 12% year-over-year (YOY). The leading driver of the growth was the significantly high demand for HBM. There was a double-fold increase in the sales of HBM during the quarter, indicating strong demand for Micron's latest memory technology. On the other hand, gross margins were also up by three percentage points quarter-over-quarter to 39.5%, mainly due to better product mix and pricing.

Notably, the data center sales increased its YOY growth up to 400% and QOQ up to 40%, which reflects the company's focus on AI as the major driver of its evolution. Micron's staple DRAM business continued to be a key product contributing 73% of the company's total sales. DRAM revenue surged 20% on a sequential basis due to healthy demand for AI applications. In the future, Micron forecasts a mid-teens percentage increase in DRAM demand for 2025, which will be a promising sign for the company.

Strategic initiatives continue delivering results, with high-volume shipments initiated to the second major HBM customer and the third during the next quarter. These initiatives are expected to contribute multiple billions to fiscal year 2025 revenue showing the critical role of Micron's advanced memory technologies.

Short-term challenges due to Q2 guidance

Nonetheless, Micron's guidance for Q2 2025 is giving investors a pause despite a heady Q1 result. The company forecasted baseline sales of $7.9 billion, which is way below the $8.93 billion projected by analysts. This guidance caused Micron's stock to fall by 16%.

That said, CEO Sanjay Mehrotra sees this as a near-term issue and expects a better second half of FY25, benefiting from a recovery in inventory and demand. Micron's HBM product line is one that has been growing at an incredible rate and that puts Micron in the right place for great profit growth.

Source: Micron's Financial Result (FQ1 2025) Presentation

Micron's revenue and earnings set to soar

While Q2 guidance was below investors' expectations, the company has great potential for growth with analysts predicting this fiscal year's revenues to reach $35 billion, up 39%. The growth does not stop here, the company expects FY26 revenue to increase by a further 28% to just shy of $45 billion.

The real story here though is the earnings trajectory of Micron. Starting only from $1.30 per share for fiscal 2024, the anticipated EPS growth for FY25 is $6.92 per share, a more than five-fold jump. The forecast for FY26 is an amazing 65.4% increase to $11.45 per share. These numbers demonstrate Micron's advantage in generating increased sales with the memory and storage markets, while operational improvements drive up profitability.

With the market digesting Q2 guidance, the company's strong fundamentals as well as growth prospects make this an ideal re-entry for long-term investors.

Micron's competitive valuation advantage

Micron's valuation multiples paint a good picture within the broad semiconductor industry. Its forward P/E ratio is 14.07 times, trading at a discount of 43.4% to the sector average of 24.85 times. A more telling metric is the forward PEG ratio which currently remains at 0.38 times below the sector's average of 1.85 times, thus indicating the stock's capability for growth relative to earnings. In addition, the company has an EV/EBITDA forward multiple of 6.48 times which is 58.1% lower than the average. However, despite the Price-to-Book forward multiple of 2.10 times, which is 13.95% above its five-year average, Micron still presents an undervalued outlook in the sector, which has an average of 4.21 times. These valuation figures collectively hint at Micron's ability to keep growing while being affordable.

When comparing Micron with competitors Analog Devices (ADI, Financial) and Marvell Technology (MRVL, Financial), Micron has exceptionally attractive valuation ratios. For example, while ADI's forward P/E is 30.18 times and MRVL is even higher at 73.96 times, Micron's forward P/E looks comforting for value-focused investors. Transitioning to growth potential, Micron's PEG ratio is substantially lower than that of ADI's 1.80 times or MRVL's 1.96 times, thereby supporting Micron's position. Furthermore, Micron outshines ADI's 24.12 times and MRVL's 53.01 times Forward EV/EBITDA. Even its Price-to-Book ratio outpaces its competitors, which is an extra layer to the value narrative.

Source: Author Generate Based on Historical Data

Micron's strong growth potential and significant upside

Alongside attractive and modest valuation, Micron's share price has risen by 78.96% over the 5 years and 22% over the past year, evidencing its stable and sustainable growth capabilities in the future.

Moreover, despite the sell-off after the earnings release, the analysts are still bullish giving an average price target of $128.82 to Micron, which represents a potential upside of 25.40%.

Last but not least, based on strong fundamentals, growth, AI memory market exposure, and competitive valuation, my fair 12-month target for Micron is $134. This target shows about 30% upside from its current price of $103. Therefore, right now, it is a good opportunity for investors to go all in.

Risk to my thesis

Like any other stock, Micron also faces some risks that cannot be ignored. It was a challenging FY2023 for the company as both revenue and EPS were affected primarily by the U.S.-China trade war. It might have a lot to lose as the exposure to China is still significant, and with Donald Trump back in the White House, there is a chance of a new conflict between the two economic giants.

In addition to this, the stock's momentum has been a little sluggish lately. Notably, with the company's next earnings release for March, it might take some time for the market to regain hope.

Competition is also increasing as Samsung and SK Hynix (HXSCF, Financial) are gearing up in their AI drive. However, the technological portfolio of Micron and its existing range of products should be sufficient enough to maintain a competitive strategic position. It isn't a short-term play, but if you can wait, it's likely going to be a winner in the long-term growth story.

Final word

In conclusion, Micron seems like a smart investment for those who want to ride the wave driven by the AI memory market. Of course, the drop after Q2 guidance might have spooked some, but don't let that distract you from the bigger picture. Micron is taking action by leading with innovation, partnering with AI giants like Nvidia, and keeping its financials solid.

Moreover, Micron has an excellent case because it has strong growth prospects, impressive earnings momentum, and an attractive valuation versus its peers. The long-term rewards here are worth more than the short-term volatility if you're willing to ride it out. Honestly, this is a solid opportunity to get in while the stock has room to run.

This article first appeared on GuruFocus.