In light of Micron Technology’s (NASDAQ:MU) high leverage to the ongoing AI boom, very rapid growth and low valuation, I recommend that investors buy the shares of the memory-chip maker. Also importantly, many on Wall Street appear to be quite bullish on MU stock despite its anemic valuation.
High Leverage to the AI Boom
On the firm’s last earnings call, CEO Sanjay Mehrota reported that “rapidly growing
AI (artificial intelligence) demand” had caused the company’s revenue from data centers to jump 50% last quarter versus the previous period. What’s more, the CEO noted that the company’s market share in multiple “high-margin AI-related product categories” had increased. Finally, Mehrota stated that as a result of the strong demand for its AI-related data center products, the company intends to implement “continued price increases throughout calendar 2024” on its products.
Moreover, as a result of anticipated strong demand for “AI PCs and AI smartphones and continued growth of AI in the data center” in 2025, the CEO expects the company to be able to grow its profit meaningfully next year as well. As a consequence of these trends, Mehrota predicts that the company’s revenue will set another record next year.
Also likely to help the company going forward is that, according to Mehrota, its new high bandwidth memory product, known as HBM3E, “has 30% lower power consumption compared to competitors’ solutions.” And encouragingly, the CEO indicated that the firm expects its share of the HBM market to climb a great deal in the coming months, and he reported the company is sold out of HBM products through next year.
According to AI solutions provider Equus Complete Solutions, “when it comes to setting up cabinets meant for AI use cases, utilizing advanced memory and storage hardware can significantly reduce the time required to train AI models, lower computing costs and enhance the accuracy of AI inferencing across vital use cases.” Given all of the advantages with which advanced memory can provide data centers that implement AI, I expect the demand for such memory to continue to climb very rapidly for the foreseeable future.
Rapid Growth and Tiny Valuation
In Micron’s fiscal third quarter that ended in May, its operating cash flow climbed to $2.48 billion versus a paltry $24 million during the same period a year earlier and $1.22 billion in the previous quarter. On the top line, the firm’s sales climbed to $6.8 billion from $3.75 billion in the previous year.
Despite those huge increases, the firm’s forward price-to-earnings ratio is a tiny 10.75 times, while its enterprise value-to-EBITDA ratio is also quite low, coming in at 16.5 times.
On the balance sheet, the firm’s net debt is a relatively low $5.5 billion.
Many on the Street are Bullish on Micron Stock
In the wake of Micron’s fiscal Q3 results, multiple major banks remained upbeat on the firm’s shares. Wells Fargo reiterated its “overweight” rating on the shares, as the bank expects the company to benefit from favorable demand going forward. The bank is also upbeat about the firm’s new high-bandwidth memory product. Wells expects the offering to enable the company to beat analysts’ average estimates for “multiple” quarters.
In addition to high bandwidth memory, Bank of America expects the company to benefit from strong demand for its high capacity computer-memory product known as DDR and for its solid-state drives for data centers. The bank kept a “buy” rating on the shares.
Meanwhile, analysts have an average price target on Micron stock of $169. That’s way above the stock’s current price of $88. Also boding well for the shares, 32 analysts have a “buy” or a “strong buy” rating on the name, while only three have a “hold” or a “sell” rating on it.
On the date of publication, Larry Ramer held a long position in MU. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
