Why the Market Continues to Sleep on Micron's Growth Potential

The behavior of Micron (NASDAQ: MU) stock has shown extreme volatility, particularly over the last year. The stock made gains of almost 690% over the last 12 months, only to fall by nearly 30% since peaking in June.

The pullback was likely a breather from a run that accelerated in April. Nonetheless, a relatively low valuation may leave some investors confused as to why Micron has not risen further. However, a key factor plays into that, and consequently, the stock could struggle to realize its full potential for that reason.

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Why Micron stock may struggle

Micron's stock is likely not meeting its full potential due to its historical volatility.

In some sense, the stock is an incredible bargain below $1,000 per share. The company has experienced massive revenue increases when demand exceeds supply and chip prices spike. However, that trend cuts both ways. When supply exceeds demand, revenue growth has often experienced dramatic reversals, causing profits to fall and the stock price to crater.

Oversupply is not an issue right now. In the first nine months of fiscal 2026 (ended May 28), revenue of $79 billion surged 203% compared to the same period last year. Additionally, the company's $47 billion in net income for the first three quarters of fiscal 2026 amounted to a 60% net margin. It also far exceeded the $5 billion earned in the same period one year ago.

Looking forward, analysts forecast 247% yearly revenue growth in the current fiscal year. Also, while the 85% revenue increase forecast for fiscal 2027 is technically a growth slowdown, it still suggests the upcycle is unlikely to end soon.

Nonetheless, that profit increase amounted to a trailing price-to-earnings (P/E) ratio of 20, a low level given that massive growth. Furthermore, the forward P/E ratio of 12 shows that investors are reluctant to bid the stock price higher despite the anticipated growth that the forward multiple implies.

Admittedly, the current demand for high-bandwidth memory (HBM) has benefited Micron. The company has also compelled customers to sign five-year price agreements, offering Micron a degree of safety that the previous one-year contracts did not.

Still, investors need to remember that supply has caught up (and usually exceeded) demand in every previous upcycle. Moreover, it may face competition beyond its traditional rivals, Samsung and SK Hynix. Chinese manufacturers like ChangXin Memory Technologies may begin producing HBM by the end of the year, potentially reducing Micron's pricing power in the future.

Given the revenue forecasts, Micron's growth is unlikely to end soon. Nonetheless, the potential entry of another competitor shows that investors must always be on the lookout for a downturn that could validate the concerns of the company's bears.

Investing in Micron

Investors should accept that Micron's historical cyclicality likely means Wall Street will continue to sleep on the company's growth potential.

Admittedly, the company's current financials give investors no reason to believe its rally will end soon. Unfortunately, history shows the profound negative effects of a Micron downcycle, and its current success will not prevent HBM from becoming cheaper as supply catches up to demand.

The five-year agreements could mitigate the effects of a downturn. Still, further gains in the stock will likely depend on the chip stock showing that the upcycle is far from over.

Will Healy 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.