Memory-chip maker Micron Technology (MU 0.88%) is on a roll. The stock has delivered a total return of 130% over the last year, including a 64% surge in three months.
It feels funny talking about how big a company named after a tiny measurement might get, but that's the question on every Micron investor's mind. Is the stock still primed for further gains or is it more likely to run into a glass ceiling and back down again?
The catalysts behind Micron's stock surge
Micron benefits from a couple of robust market trends. The computer systems that create, train, and operate high-powered artificial intelligence (AI) tools require a metric truckload of memory. One Nvidia (NVDA 0.25%) V100 AI accelerator card comes with 32 gigabytes of high-speed memory, for example, 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 a terabyte of high-speed SDRAM each, which is roughly 100 times the V100's memory capacity.
Long story short, AI computers need a lot of memory. That's good news for leading chip suppliers like Micron.
At the same time, the memory market is cyclical and currently on an upswing from the last downturn. Predicting future demand for computing hardware is notoriously difficult due to rapid technological advancements and shifting market trends.
Nobody foresaw the COVID-19 crisis or the generative AI boom. Hence, the memory sector is almost always either trying to meet unexpectedly huge product demand or stuck with warehouses full of oversupply.
At the moment, 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 crunch that started with the coronavirus pandemic.
Micron's financial outlook
Micron's stock is rising for several good reasons. When they're all taken together, the memory market is poised for several years of overwhelming product demand, driving chip prices higher while widening Micron's profit margins. And it's still early in the positive part of a familiar cycle -- at $18.3 billion, Micron's trailing sales are 44% below the most recent peak of $32.4 billion.
The company's shares aren't exactly on fire sale. The stock is reaching all-time record prices on a nearly daily basis right now, far exceeding even the lofty peaks of the dot-com era.
You can't call it "expensive," either. Micron shares are changing hands at quite reasonable valuation ratios, such as 9.3 times sales and 17 times forward earnings projections. These ratios should shrink as the economic upsides I discussed earlier are converted into robust revenue, earnings, and cash flow.
Should you invest in Micron now?
Micron is well-positioned to benefit from the ongoing AI boom and increasing semiconductor demand in electric vehicles. Smartphones are also gaining AI features, boosting their need for high-speed memory chips. The company is ready to supply these unstoppable market trends.
The stock's recent gains reflect these positive signals, but is it too late to buy Micron stock? The answer is no.
I think there's more upside 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 upswing. Investors should see this as a chance to capitalize on Micron's strengths. In my mind, Micron's soaring stock has the fuel to keep rising from here.
Keep a close eye on the underlying market forces, perhaps preparing to take some profits off the table when the tide starts to turn. Or you can do it my way, holding Micron stock for the long run and adding more on the cyclical price dips.
