Micron Technology, Inc. (MU), one of the leading chipmakers in the world, has seen substantial market volatility this year with the stock reaching a record high of around $158 in June, only to crash to $86 earlier this month before regaining some lost ground. This volatility has created an opportunity for long-term investors as the company seems well-positioned to benefit from several favorable macroeconomic developments. I am bullish on the prospects for Micron as I believe the company will register strong earnings growth in the next five years despite intensifying trade tensions between the U.S. and China.
Macroeconomic Improvements Drive Micron’s Bullish Outlook
To begin with, my bullish stance for Micron, as noted earlier, stems from the improving macroeconomic outlook for several end markets served by the chip giant.
One of the main reasons behind this optimistic view is the rising demand for high-bandwidth memory products, commonly referred to as HBM. These products boast substantially higher data transfer rates compared to traditional DDR memory products, allowing for greater power efficiency and bandwidth. According to industry experts, HBM products will play a crucial role in the growth of AI applications, the widespread use of Virtual Reality, the expansion of 5G networks, and the expected growth in autonomous driving and robotaxis.
Furthermore, according to Mordor Intelligence, the HBM market is valued at approximately $2.52 billion today and is projected to grow at a CAGR of 26% through 2029, reaching a market value of $8 billion. The research firm believes the unprecedented demand for highly scalable memory solutions and high-bandwidth products will play a key role in this growth.
In response to this expected demand growth for HBM products, Micron announced in February that it has begun high-volume production of HBM3E, the company’s HBM solution. Additionally, according to the findings of KeyBanc Capital Markets analyst John Vinh, HBM3E is a superior product from a power efficiency perspective when compared with competing products from SK Hynix and Samsung.
Based on these remarks, it is reasonable to conclude that Micron is well-positioned to enjoy competitive advantages in the fast-growing HBM solutions market, which should boost earnings growth in the next few years. In fact, Micron CEO Sanjay Mehrotra believes that the company can capture a 25% share of the HBM market by 2025, opening doors for long-term domination of this niche market.
Moreover, the strong demand for HBM solutions is not the only favorable macroeconomic development enjoyed by Micron today. DRAM prices have been trending higher recently, expanding the profit margins of key players in this sector, such as Micron. The reasons behind rising DRAM prices include supply constraints, the growing demand for high-performance computing, and the increased demand from smartphone manufacturers as they rush to design 5G-enabled devices. Not surprisingly, chip companies shifting their focus to manufacture HBM products has also led to a supply scarcity for traditional DRAM products, resulting in pricing power for chipmakers.
Considering these factors, Morgan Stanley analysts believe the demand for DRAM products will exceed supply by 23% in 2025, leading to strong price growth for these products. Over the last 12 months, DRAM products have accounted for more than 70% of Micron’s revenue, and robust pricing growth for these products will boost the company’s revenue in the next fiscal year.
In addition to these favorable developments, the U.S. government’s strategic decision to support domestic chipmakers will also prove to be a tailwind in the long run. For instance, Micron secured $6.1 billion in federal funding through the CHIPS Act to construct new memory chip manufacturing plants in Idaho and New York. These manufacturing plants will contribute to Micron’s DRAM production from 2026, enabling the company to meet the increasing demand for these products.
Identifying Challenges that Could Impact Micron’s Growth
Although I remain bullish on Micron due to several favorable macroeconomic developments, I believe investors need to closely monitor a few risks that are looming on the horizon to identify potential inflection points in the company’s growth story.
One of the biggest risks facing the company today is the deteriorating relationship between the U.S. and China. In October 2022, the Biden administration imposed major restrictions on semiconductor technology exports to China, including memory chips, and these restrictions were expanded in July 2023 to include NAND and DRAM products on a broader level. With the presidential election fast approaching, the federal government has threatened to impose additional restrictions.
The aforementioned export controls will have a direct impact on Micron’s revenue as the company generated more than 10% of its 2023 revenue from China. An escalation of trade tensions between the two largest economies in the world, therefore, poses a major risk to the company’s international operations.
Beyond geopolitical tensions, another critical area for investors to monitor is Micron’s liquidity profile. The company has ambitious plans to invest $50 billion over the next decade to expand manufacturing capacity in order to meet the growing demand for advanced memory products. However, if Micron fails to maintain a healthy balance sheet, it could be forced to scrap these planned investments, especially if federal funding does not become available as anticipated.
Is Micron a Buy, According to Wall Street Analysts?
Despite the risks discussed in the previous segment, Wall Street analysts are bullish on the prospects for the company. Last week, Wolfe Research analysts boosted their Micron price target to $200 based on expectations for strong earnings growth resulting from the increased adoption of high-bandwidth memory products. The research firm projects Micron’s earnings per share to reach $20 in the next few years, up from an estimated EPS of just $1.22 in the current fiscal year.
Wolfe Research is not alone in predicting robust earnings growth for Micron. Wells Fargo, which has a $190 price target for the chipmaker, believes the company will benefit from the growing demand for memory products as AI is still in the early stages of mass adoption. Barclays, Stifel, and UBS analysts have assigned Micron price targets of $175, $165, and $155, respectively, suggesting the company is deeply undervalued today.
Based on the ratings of 27 Wall Street analysts, the average Micron price target is $167.30, which implies upside of 69% from the current market price.
Along with the strong demand environment for Micron’s memory products, the resumption of the share buyback program also makes Micron stock attractive today. After suspending the buyback program in 2022 due to challenging market conditions, Micron announced earlier this month that the buyback program that was authorized in 2018 to purchase up to $10 billion worth of Micron stock in the open market will be reinstated to distribute wealth to shareholders. As of the last quarter, the company had more than $3 billion remaining in this buyback program.
The Takeaway: Micron’s Long-Term Prospects Are Bright
Micron stock has seen increased volatility this year. However, the company’s long-term prospects remain bright, with Micron set to benefit from a few favorable macroeconomic developments including the growing demand for high-bandwidth memory products. Wall Street analysts have turned bullish in the recent past after digesting the improving industry conditions, but investors need to keep an eye on geopolitical tensions that threaten Micron’s growth. In conclusion, I believe the recent volatility in stock prices has created an opportunity for long-term investors as Micron is poised to see strong earnings growth.
