Is Micron Stock Going to $500?

Micron Technology (NASDAQ: MU) has recently become one of the hottest artificial intelligence (AI) stocks on the market, with shares already up by 50% so far this year amid soaring demand for data center hardware. The company's high-bandwidth memory chips have become integral for training and running large language models (LLMs).

That said, with a stock price of $428 at the time of writing, Micron is now worth $470 billion. This valuation makes it one of the largest companies in the world despite operating in an industry typically known for weak margins and extreme cyclicality. Let's dig deeper to find out if Micron can maintain its momentum and potentially hit a stock price of $500 this year.

Why is Micron booming?

Big tech companies are rushing to build AI data center capacity at a blistering rate, with Wall Street expecting the top four hyperscalers to pour a whopping $700 billion into capital expenditures this year alone. Some of the spending will go to Micron's memory hardware. These devices help AI companies store the training data for LLMs while also providing the quick working memory they need to sift through already trained data to answer user queries (a process called inference).

This situation is ideal for Micron because it is boosting demand for the company's highest margin and most profitable products. Fiscal first-quarter revenue (which ended on Dec. 15) jumped 57% year over year to $13.6 billion, with operating income rising by 168% to $6.42 billion.

The booming growth was driven by Micron's cloud memory division, where it sells its most advanced hardware to cloud computing companies. These chips sell at dramatically higher gross margins than Micron's other products, which is leading to a cash windfall for the company. This particular segment has a gross margin of 66%, and investors should expect this number to potentially rise over the next few quarters because memory chip demand currently outstrips supply, leading to shortages.

What are the challenges in the memory chip industry?

Micron's rising margins are exciting because they haven't always been this good. The computer memory industry suffers from a challenge called commodification, which means the hardware isn't well differentiated between the different producers. A memory chip built by Micron can be easily replaced by one from Samsung Electronics or SK Hynix, forcing the large producers to compete with each other on pricing.

Furthermore, during boom times, the memory producers typically rapidly expand their production capacity, leading to oversupply when market demand cools. With these challenges in mind, investors shouldn't expect the current memory shortage to last forever. And Micron will need to translate the windfall from the AI boom into long-term shareholder value.

Image source: Getty Images.

The easiest solution would be to focus on buybacks and dividends, which can directly reward shareholders by reducing the number of shares outstanding and boosting EPS. However, management has remained very restrained on this front, only repurchasing $300 million worth of shares in the fiscal fourth quarter -- a paltry amount for a company that generated $8.4 billion in operating cash flow during the same period.

On the other hand, Micron has been more aggressive about expansion, announcing plans to spend an eye-popping $200 billion to expand its DRAM production capacity over the next few years.

Can Micron stock hit $500?

Micron's stock would have to rise around 17% to reach a price of $500. This growth is easily achievable in the near term, considering the favorable dynamics in the memory chip industry and the company's relatively low forward price-to-earnings (P/E) multiple of 12.

That said, over the long term, the company's massive expansion in memory production capacity could lead to a supply glut, especially if AI-related demand doesn't meet expectations. While Micron stock is a buy, investors should make sure to hold it as part of a diversified portfolio to account for these increasingly relevant risk factors.

Will Ebiefung 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.