Micron: Key Beneficiary Of AI But Too Richly Valued (NASDAQ:MU)

JHVEPhoto Micron Technology (NASDAQ:MU) is one of three major players in the global memory chip market. The stock has significantly outperformed the broader S&P 500 in 2024, as investors have come to realize the importance of memory, particularly high-bandwidth or HBM capacity in training AI models. Demand for high-bandwidth memory has been the key narrative driver of the stock. The firm was recently dubbed part of the “AI Big Ten” by Bank of America’s (NYSE:BAC) chief strategist Michael Harnett. Recognition of Micron alongside other heavyweight tech names tells us the HBM story is now fully understood. The importance of memory capacity in the AI story is undeniable and is likely to remain a secular growth driver for Micron and its Korean memory rivals. However, I will argue below that the valuation has become stretched for MU. I recommend a hold, as I think we should wait for a better entry point than the current price. I think investors seeking instant exposure to the HBM theme in AI would be better placed buying Samsung which I wrote about previously. Korea Herald It’s All About AI In essence AI models are the result of extremely powerful computers running complex algorithms. In the same way that any general purpose computing application requires memory, so too does AI training, but at a significantly higher level. To achieve the performance required for AI, memory chip companies have rapidly developed new advanced high-bandwidth memory which addresses prior bottlenecks. The below graphic from AMD (NASDAQ:AMD) illustrates some of the technical challenges which needed to be overcome. AMD Analysts at Mizuho stated in a recent note that they see the supply of the most advanced, fifth-generation of high-bandwidth memory known as HBM3E currently being led by Micron and Korea’s SK Hynix. Market demand has been insatiable with Micron fully sold out of supply for 2024 and fully sold out for 2025. NTEL Research Tom O’Malley at Barclays recently noted that spending on memory as a percentage of total semiconductor spending is set to rise, a forecast which bodes well for firms such as Micro. “The core belief is that memory is more critical to the advancement of Semis than ever before and should move to 25-30% of industry spend from 10-15% today”. (Tom O’Malley) The company has also been boosted due to being the beneficiary of federal funding via the CHIPS and science act. In April, it was announced the firm would receive over $6B in direct funding to assist in the development of two new memory production facilities. Holding the distinction of being the only US firm capable of producing leading edge memory, makes Micron a clear target for future federal funding as the US seeks to ensure its supply of technologies deemed important to national security. The existing level of federal support is a clear positive for the stock, but this optimism is already priced into the stock in my view. Earnings Micron reported its fiscal Q3 earnings after the bell on Wednesday. Shares fell by close to 6% during Thursday’s session as markets digested numbers which were good but failed to shoot the lights out. The weak share price reaction to such a strong set of numbers suggests some euphoria had already been priced into the stock. The firm reported EPS of $0.62 which beat consensus by 9 cents and revenue of $6.8B which was also better than forecast. Management guided for an EPS range of $1 – $1.16 for the next fiscal quarter, a number which markets were generally unimpressed by. Despite the negative price reaction, there was plenty of positive points for investors. The firm confirmed the HBM capacity is fully sold out for 2024 and 2025 with pricing mostly contracted already. In addition, 2025 should see a PC refresh cycle driven by the end of life support for windows 10. Valuation When assessing memory chip companies the preferred valuation framework is to use Price to Book. Due to the highly commoditised nature of memory chips, the market exhibits a very strong cyclicality. As a result a PE approach will often be very volatile and not necessarily indicative of the underlying business value. For example, if we look at the current P/E forecast for 2024 & 2025 we see a dramatic drop from close to 122x to just 15x. Seeking Alpha Highly cyclical stocks often exhibit the above type P/E volatility which make it inherently not useful as a metric. Hence the industry preference to adopt the price-to-book standard, as the metric better reflects a consistent business valuation. Looking at the current P/B for the stock we can see it trading right at the top of its historical range. In my opinion, the stock justifiably trades at the top of a historical range given the enthusiasm and demand related to AI products. However, given where we are from a valuation perspective it appears good news is fully priced into the stock. I see little valuation upside from here. Given the sensitivity the stock displayed to a marginal disappointment in recent earnings, I think the patient investor will get an opportunity to purchase the stock at a more reasonable valuation in future. Koyfin Analysts at Morgan Stanley led by Joseph Moore recently upgraded Micron to equal-weight. They admitted underestimating the impact HBM would have on sentiment. However, despite the HBM boost and rating upgrade, they still see shares as too richly priced noting they see it as fundamentally overvalued. A view which tallies with my thesis, a good stock but at the wrong price. Conclusion I believe that HBM is an integral part of the AI secular narrative and Micron stands well positioned as one of only three firms globally to produce memory at scale. The firm is operating at the cutting edge of technology and it has seen ravenous demand for its chips, as evidenced by fully sold out capacity for the next two years. However, I am of the opinion that the market at this time has fully priced in the tremendous growth and analysts at Morgan Stanley see the stock as fundamentally overvalued. As a result I recommend investors hold fire for now, waiting for better opportunities to present themselves. In the meantime, I think Samsung offers more compelling value as part of a catch up play as it has been slower to get moving on HBM vs its two peer memory firms, a dynamic I suspect will reverse.

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