Is Micron Stock Going to $1,625? 1 Wall Street Analyst Think So.

The Wall Street analyst who sparked a breakout rally in Micron (NASDAQ:MU) stock back in May is back with an update.

UBS's Timothy Arcuri reiterated his buy rating and price target of $1,625 in a note this week, ahead of the memory-chip maker's fourth-quarter earnings report on Sept. 30.

Micron shares have skyrocketed over the last year as the company has been one of the biggest winners in the memory chip shortage sparked by the AI boom. Its revenue is growing by triple digits, and its operating margins have expanded to 80%, a rare feat for any company and a sign of how high memory prices have gone.

However, the stock has been volatile in recent months, as investors are unsure how long the boom will last. Historically, memory is highly cyclical. Micron was losing billions of dollars a year as recently as 2023, and at some point, prices will come down as more supply comes online and demand growth eases, though that is still years away.

Image source: Micron.

The way UBS sees it

Arcuri clearly sees more upside to Micron. In a recent commentary, he noted that the company's fundamentals continue to improve, with the supply-and-demand gap widening.

That could put Micron in position for another massive beat when it reports earnings next week. The analyst consensus currently calls for fourth-quarter revenue to jump 352% to $51.2 billion, and for adjusted earnings per share to surge from $3.03 to $31.56. In its last three earnings reports, Micron has beaten EPS estimates by 20% or more, a sign that it could easily clear the consensus bar again.

In addition to the favorable supply-demand dynamics, Arcuri sees a tailwind emerging from potential share buybacks since restrictions on buybacks from the CHIPS Act funding the company received are set to expire on Dec. 9.

Buybacks could be an easy way for Micron to generate shareholder value, as the stock is cheap based on forward earnings, currently trading at less than 7 times fiscal 2027 expected EPS. Through the first three quarters of the year, the company has repurchased just $1.4 billion in common stock, even as its cash flow has lagged profits due to the timing of receivables and delays in collecting cash from its customers. Total shares outstanding are up slightly over the last year, reflecting modest share-based compensation.

Arcuri suggested the company could buy back $20 billion in stock each quarter and increase that to $50 billion a quarter a year from now. That target seems reasonable considering the company will bring in more than $30 billion in net income in the fourth quarter.

After paying off $9.4 billion in debt this year, the company has just $5.7 billion in debt. A dividend hike is another possibility to reward shareholders, but increased buybacks make more sense at the current valuation.

Micron just began construction on a $100 billion facility in upstate New York, but that is a 20-year project that will be funded primarily from its balance sheet with some help from grants, tax credits, and state and local incentives.

Finally, Arcuri was sagacious about the peak of the cycle, predicting that memory prices would start to fall in the second half of 2028, but said that profits would still be higher than current levels due to share buybacks and the strategic pricing agreements the company has forged to lock in pricing over the next five years.

Can Micron get to $1,625?

When Arcuri first gave his $1,625 price target in May, the stock jumped 19% in a day and climbed more than 40% over the next two weeks.

These days, the $1,625 price target is more pedestrian and closer than the consensus around $1,500.

However, price targets don't make a stock go higher. Micron will have to continue to deliver strong results and show investors that this boom has more durability than just a single cycle. Management commentary on 2028 will be especially important in next Wednesday's earnings report, but Arcuri's thesis seems reasonable. Micron has wisely shifted to longer-term contracts with its customers, and buybacks should help lock in gains from the memory shortage windfall.

If Micron follows through on expectations and the memory market remains tight, $1,625 is within reach over the next year.

Jeremy Bowman has positions in Micron Technology. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.