Micron Technology (MU +15.40%) is one of the hardest companies to project in the market. While it's booming right now, the industry that it operates in is cyclical, which could lead to investing headaches years down the road. On the flip side, there is a huge supply constraint that could provide years of excellent growth until the memory crunch is solved.
Investors must make a decision regarding Micron's stock now as to whether or not it will set them up best for long-term returns. So, where will Micron be in five years?
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Memory chips are a cyclical market
There are two primary types of computing chips: logic and memory. The phone or computer you're reading this article on now has both, and both are critical to the device's operations. However, each of them has different properties. Logic chips are quite different, and whenever you hear a company brag about its process capabilities and how it sets them apart from the competition, that's due to the ability to design advantages into logic chips.
As a result, the prices are set and differentiated based on ability. When was the last time you heard any company bragging about which memory chip is in there? You haven't. They only tell you how much is in there. That's because there isn't a lot separating memory chips from each other. As a result, this product has become a commodity.
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Key Data Points
Micron is a memory chip manufacturer, and although it's one of the leading producers, there isn't a ton separating it from the competition. However, the demand for memory chips, especially those used in artificial intelligence (AI), is booming. Micron estimates that high-bandwidth memory (HBM), the type used in data centers, will see its total addressable market expand from $35 billion to $100 billion by 2028. That's a big gain, but Micron cannot keep up with it.
Management estimates it can only provide half to two-thirds of the medium-term demand it's seeing. That's the same experience being felt across the board with memory chip manufacturers, which is causing a demand crunch. Simple economic theory states that when supply is low and demand is high, prices will boom, and that's exactly what's going on with Micron.
Micron's business is booming
Due to soaring prices, Micron is seeing unbelievable revenue growth. Two quarters ago, it generated $13.6 billion in revenue. Last quarter, it produced $23.9 billion. Next quarter, management estimates it will report $33.5 billion. That is an unbelievable growth trajectory, and if it holds, it will make Micron one of the biggest revenue-producing companies in the world.
That boom is expected to last for a while, and the average Wall Street analyst expects Micron to produce $169 billion at the end of fiscal 2027 (ending around July 2027). For reference, Taiwan Semiconductor Manufacturing, a $2 trillion company, generated $133 billion over the past 12 months. Micron is currently a $560 billion company, so a quadruple could be in store over the next few years if the market chooses to value Micron like its chip manufacturing peer (TSMC makes logic chips).
However, because of its cyclical nature, the market doesn't value Micron at a full valuation, and it is priced at 8.6 times forward earnings.
TSM PE Ratio (Forward) data by YCharts
That reflects the market's concern about what Micron will look like in five years rather than what it's doing now. As a result, I think investors should be careful investing in Micron, as its cyclical nature could come back to bite investors if they aren't careful. However, the stock could still move higher in the meantime -- so as long as you monitor the stock, it could be a great opportunity.
I think Micron will have a great five-year stretch, but memory chip demand could be a lot lower five years from now, which will dramatically reduce memory chip prices, causing Micron's stock to fall. On the flip side, if memory demand lasts beyond five years, Micron's stock could have a great end to this five-year run.
It's impossible to know what the future holds five years later, but as of right now, Micron's future looks bright due to soaring memory chip demand, so it could be a solid investment.
