Where Will Micron Stock Be in 3 Years?

The 47-year-old computer memory giant Micron Technologies (NASDAQ: MU) isn't typically the place to look for explosive growth and volatility in the technology industry. But generative artificial intelligence (AI) changes everything.

Hype surrounding the new opportunity has sent the company's shares up by 141% year to date and down 10% since last week, as investors rush to take profits from a sectorwide boom many feel has gone too far, too fast. Let's explore what the next three years might have in store for the stock.

Nvidia's earnings sent a chill through the industry

Leading artificial intelligence chipmaker Nvidia released its third-quarter earnings on Nov. 19. As usual, results were a slam-dunk success, with revenue jumping 62% year over year to a record of $57 billion because of demand for its cutting-edge graphics processing units (GPUs) used for running and training AI algorithms.

But despite the objectively stellar results, the news sent Nvidia stock down sharply, while also hurting other industry players like Micron, which lost roughly a tenth of its value in just two days.

On the surface, it might be surprising to see tech stocks dropping on good news. But the reaction highlights how nervous the market is becoming about the levels of AI spending in the economy. Data center companies continue to pour money into hardware, but the expenditure is not leading to profits on the consumer-facing side of the opportunity.

For example, OpenAI creator ChatGPT is believed to have lost an eye-popping $11.5 billion in the last quarter alone. And the pain is also increasingly being felt in the infrastructure side of the industry, with the GPU-focused cloud computing giant CoreWeave generating a net loss of $110.1 million in its most recently reported financial quarter.

Can Micron weather the storm?

Image souce: Getty Images.

Despite the hype, AI is a risky industry because large language models (LLMs) haven't been proven to be commercially viable at scale. That said, there is a silver lining for Micron because its picks-and-shovels business model shields it from the worst uncertainties in the market. Consumer-facing businesses take the most risk, hardware-buying middlemen take intermediate risk, and hardware producers take the least risk.

Micron is firmly on the hardware side of the value chain. It sells high-performance memory solutions like DRAM and NAND, which are critical for storing the vast amounts of training data for LLMs. The company doesn't necessarily have to worry much about what is happening on the consumer-facing side of the opportunity because it could take years for these issues to affect demand for its products. The company is also hugely diversified, with its memory solutions enjoying widespread use in the personal computer, smartphone, and automotive industries.

Historically, memory demand was hugely cyclical, experiencing boom and bust cycles because of mismatches between supply and demand caused by long production lead times. However, rising data center demand could turn these historic challenges into a multiyear opportunity for Micron.

According to the CEO of leading Chinese chipmaker SMIC, the world may be on the cusp of a memory chip shortage caused by the rapid AI data center buildout. If this trend continues, it could create a favorable environment for Micron to juice its profitability by selling higher-margin AI memory solutions while increasing the prices it charges to customers in lower-margin industry verticals like smartphones or automotive.

Where will Micron stock be in three years?

The next three years look very bright for Micron, as its picks-and-shovels business model shields it from generative AI industry uncertainty, while the memory chip shortage could spark a supercycle of demand for its hardware. The company's rock-bottom valuation is icing on the cake for investors. With a forward price-to-earnings (P/E) multiple of just 14, the stock trades at a sharp discount to other AI-infrastructure plays like Nvidia or AMD, which boast forward P/Es of 27 and 36, respectively.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.