Despite Rising More Than 300% in 1 Year, Micron Stock Looks Cheap. But Is It a Buy?

Key Points
Micron's fiscal second-quarter revenue surged 196% year over year, driven by seemingly insatiable demand for artificial intelligence hardware.
Management guided for an astounding 81% gross margin in the upcoming quarter.
With shares trading at a single-digit forward earnings multiple, the market is already pricing in a cyclical peak.
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Shares of Micron Technology (NASDAQ: MU) have been on a historic run. As of this writing, the stock is up more than 300% over the past 12 months, riding an extraordinary wave of demand for specialized memory chips powering artificial intelligence (AI) data centers.
What's wild, however, is that despite the stock's wild run-up, Micron's valuation still looks attractive. And it looks downright cheap when considering analysts' consensus earnings forecast for the next 12 months.
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But investors need to think longer term. How long can this supply demand imbalance last? And how long can Micron command such incredible pricing power? The unknowns surrounding these questions may help explain why the stock has been under pressure more recently (shares are down more than 14% in one week), despite the company posting incredible fiscal second-quarter results.
Mind-boggling growth
Micron's fiscal second-quarter revenue soared 196% from the year-ago quarter to $23.86 billion. Equally as impressive, this represents a 75% sequential jump from the prior quarter.
The bottom line grew even faster. Micron's adjusted earnings per share came in at $12.20 -- up 682% year over year.
"Quarterly revenue nearly tripled versus one year ago, and revenue for DRAM, NAND, HBM, and each business unit reached new highs," explained Micron CEO Sanjay Mehrotra in the company's fiscal second-quarter earnings call.
The core driver, of course, is the aggressive infrastructure build-out supporting generative AI. These workloads require vast amounts of high-bandwidth memory (HBM) and data center solid-state storage.
As hyperscalers race to secure supply, Micron's production can't keep up.
A jaw-dropping outlook
And the company's guidance is even more extraordinary than its recent momentum. For fiscal Q3, management expects revenue of roughly $33.5 billion. And Micron guided for an adjusted gross margin of approximately 81% -- up from about 38% in the third quarter of fiscal 2025 and 75% in the second quarter of fiscal 26.
This is a phenomenal figure for any type of company, let alone a hardware manufacturer. It reflects an environment where demand far outstrips supply, and buyers are willing to pay almost any price to secure components.
That pricing power, of course, flows directly to the bottom line. Management expects fiscal Q3 earnings per share of $18.90 -- up from $1.68 in the third quarter of fiscal 2025 and $12.07 in the second quarter of fiscal 2026.
To put that in perspective, the company's expected profit for a single 90-day period now dwarfs its entire annual earnings in prior years.
The valuation trap
This brings us to the stock's valuation.
Based on the company's trailing-12-month earnings per share, the stock trades at about 19 times earnings as of this writing. For a stock growing as fast as Micron is, this already looks cheap. But where the stock looks incredibly cheap is on a forward price-to-earnings basis -- a valuation method that uses a stock's price as a multiple of analysts' average forecast for earnings per share over the next 12 months. Micron's forward price-to-earnings ratio sits at just 8.
But is this single-digit multiple for a cyclical semiconductor stock the screaming buy signal it appears to be? Playing devil's advocate, it could actually be a glaring warning.
The market is looking ahead and assuming this level of pricing power cannot last.
Memory chips have historically been a commoditized market. Periods of tight supply eventually fund massive capacity expansions, which inevitably lead to oversupply, plunging prices, and crashing margins.
While AI infrastructure requires immense amounts of high-bandwidth memory today, there's significant uncertainty about what the future memory market will look like -- both on the demand and supply sides.
Watching from the sidelines
Ultimately, the stock isn't a clear buy just because it has a single-digit forward price-to-earnings ratio. The market is smarter than that.
There are risks. If cloud providers and tech giants eventually pause their AI data center buildouts to digest recent capital expenditures, Micron's revenue and gross margin could compress just as rapidly as they expanded.
Given the unprecedented nature of this AI boom, the exact timing of the cycle turning is a major unknown. For that reason, I think staying on the sidelines makes sense. The stock looks cheap, but buying a cyclical hardware business that may be approaching peak margins is always a risky game.
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Daniel Sparks and his clinets have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.