Bull vs. Bear: Is Micron a Buy or Sell? Let's Look at the Bullish and Bearish Cases for the Stock.

In an ongoing series of articles, I'm looking at the bullish and bearish cases for some popular stocks. Next on the list is Micron (NASDAQ: MU), which, after a steep run-up over the past year, has become a hotly debated stock. Last month, it took a sharp tumble, but has since started to rebound back toward its highs.

So, does Micron have more upside ahead, or will it return to giving back its gains?

The bull case

Micron is riding one of the market's most powerful trends: a booming market for digital memory. Currently, both DRAM (dynamic random access memory) and NAND (flash) are in short supply due to increased demand stemming from the AI infrastructure buildout, which has allowed suppliers to sharply increase prices. The company gets about 80% of its revenue from DRAM and 20% from NAND.

This has led to both surging revenue and gross margins for the company. The surge in DRAM prices is being buoyed by demand for high bandwidth memory (HBM), which is a special form of DRAM that gets packaged with graphics processing units (GPUs) and other AI chips to optimize their performance. As AI chip demand continues to surge, so does the need for HBM. Making the DRAM market even tighter is the fact that HBM requires upwards of three times the wafer capacity of run-of-the-mill DRAM, which is intensifying the overall DRAM supply constraints.

Since HBM demand is soaring and those products have better gross margins and unit economics than regular DRAM, Micron and the other two big DRAM makers, SK Hynix and Samsung, are -- unsurprisingly -- putting most of their resources into meeting the demand from this market. That these companies are allocating most of their resources toward the AI data center market is also leading to supply constraints and soaring prices for NAND, which is seeing strong demand from enterprise solid state drives (SSDs) used to store AI model training data.

Neither memory market is expected to see any relief until late 2027 at the earliest; that's when some new production capacity will start to come online. Meanwhile, the DRAM market is undergoing an important shift. Micron and its Korean counterparts are starting to move away from their previous policy of inking quarterly deals for HBM, and toward three- to five-year deals. That should take out some of the cyclicality of the business. It also shows that this isn't just another bullish memory cycle, but that there is a real secular tailwind behind HBM.

With Micron trading at a forward P/E of just 4 times fiscal 2027 analyst estimates, its valuation does not reflect the current structural growth drivers it is experiencing.

Image source: The Motley Fool.

The bear case

The markets for memory products are notoriously cyclical, with huge boom-and-bust cycles. During periods when supply is tight and prices are high, it's not uncommon for customers to over-order in their efforts to secure supply. Meanwhile, those conditions encourage all players to build out their production capacity -- a process that takes a couple of years to yield results. Eventually, though, conditions have always shifted from undersupply to overcapacity, at which point prices crash.

The NAND market has been especially vulnerable to big swings. Most recently, that market crashed just a few years ago following a pull-forward in demand due to people buying more electronics during the early stage of the pandemic. When that surge in demand dissipated, there was a glut of flash memory, and prices slumped. Meanwhile, the DRAM market has also experienced its fair share of crashes, including in 2007-2008 and 2001.

DRAM cycles typically last around two to three years from peak to trough, and the market last was in a trough around the start of 2023. That suggests that if we're following a typical cyclical pattern, we are already getting pretty close to the peak. If AI data center spending is also set to peak (and with $700 billion in capex planned for this year among the biggest hyperscalers alone, how much more can these companies spend?) or if new technologies (such as TurboQuant, which reduces the need for cache memory) take off, this could put pressure Micron's pricing power, profits and stock.

The verdict

While one hates to say "this time is different," the shift to three- to five-year contracts for HBM signals that hyperscalers aren't planning to take their feet off the gas when it comes to AI infrastructure spending anytime soon. Longer-term contracts would also raise the floor on Micron's earnings during cyclical troughs, which should help the stock command a higher earnings multiple. That is why I think Micron stock looks like a solid buy at these levels, at least over the next few years.

Geoffrey Seiler has 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.