Manufacturer of memory chips Micron technology (NASDAQ:MU) is on a roll. The stock has delivered a total return of 130% over the past year, including a 64% rise in three months.
It feels funny to talk about how big a company named after a small size could become, but that’s the question on every Micron investor’s mind. Is the stock still poised for further gains or is it more likely to hit a glass ceiling and head back down?
The catalysts behind Micron’s stock rise
Micron is benefiting from a number of robust market trends. The computer systems that create, train, and operate powerful artificial intelligence (AI) tools require a metric truckload of memory. A Nvidia (NASDAQ: NVDA) For example, the V100 AI accelerator card comes with 32 gigabytes of fast memory, and a single AI server can use thousands of these cards.
And V100 isn’t even Nvidia’s latest or greatest AI accelerator anymore. The brand new GB200 card comes with more than half terabyte each with high-speed SDRAM, which is approximately 100 times the memory capacity of the V100.
Long story short: AI computers require a lot of memory. That’s good news for leading chip suppliers like Micron.
At the same time, the memory market is cyclical and is currently experiencing a rebound after the last recession. Predicting future demand for computer hardware is notoriously difficult due to rapid technological advancements and changing market trends.
No one foresaw the COVID-19 crisis or the generative AI boom. That’s why the memory sector is almost always trying to meet the unexpectedly high demand for products, or is stuck with warehouses full of oversupply.
Right now, chip prices are high and rising, thanks to the aforementioned AI boom, the rise of electric and self-driving vehicles, and the aftershocks of a semiconductor manufacturing crisis that started with the coronavirus pandemic.
Micron’s Financial Outlook
Micron stock is rising for several good reasons. All told, the memory market is primed for several years of overwhelming product demand, pushing up chip prices and expanding Micron’s profit margins. And it’s still early in the positive part of a familiar cycle: At $18.3 billion, Micron’s revenue is 44% below its most recent peak of $32.4 billion.
The company’s stock isn’t exactly on sale. The stock is currently hitting record prices almost daily, far surpassing even the lofty peaks of the dot-com era.
You can’t call it ‘expensive’ either. Micron stock changes hands at fairly reasonable valuation ratios, such as 9.3 times sales and 17 times forward earnings estimates. These ratios should shrink as the economic benefits I discussed earlier translate into robust revenues, profits, and cash flow.
Should you invest in Micron now?
Micron is well positioned to benefit from the ongoing AI boom and increasing demand for semiconductors in electric vehicles. Smartphones are also gaining AI features, increasing their need for fast memory chips. The company is ready to meet these unstoppable market trends.
The stock’s recent gains reflect these positive signs, but is it too late to buy Micron stock? The answer is no.
I think there are more benefits ahead for Micron investors. The cyclical nature of the industry means a downturn is inevitable, possibly within the next two to three years – but this is still the start of a classic industry upturn. Investors should see this as an opportunity to capitalize on Micron’s strengths. I think Micron’s soaring stock has the fuel to keep rising from here.
Keep a close eye on underlying market forces and perhaps prepare to take some profits off the table if the tide starts to turn. Or you can do it my way, by holding Micron stock for the long term and adding more to the cyclical price declines.
Should You Invest $1,000 in Micron Technology Now?
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Anders Bylund has positions in Micron Technology and Nvidia. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Is it too late to buy Micron stock? was originally published by The Motley Fool
