1 AI Stock With Nearly 100% Upside, According to 1 Wall Street Analyst

It's not often that you see a Wall Street analyst initiate their coverage of a stock with a price target nearly double where it's trading, but that is exactly what DA Davidson analyst Gil Luria did when he initiated coverage of Micron (NASDAQ: MU) this week with a buy rating and $1,000 price target.

Luria argues that the current memory cycle will not be like the ones of the past, when memory chip manufacturers as a group expanded their production capacity to meet high demand, but eventually overshot the mark, leading to oversupplies that caused prices to collapse. This time, he thinks the artificial intelligence (AI) infrastructure build-out will lead to a much longer-than-typical memory chip cycle.

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The analyst added that he is not arguing that the memory market has ceased to be cyclical. Rather, he's saying that the market is underestimating what the strength and duration of the current expansion phase of that cycle will be. Meanwhile, he said that Micron's strategic shift to start signing five-year sales deals for high bandwidth memory (HBM) improves its visibility into future sales and earnings.

Luria believes Micron could generate $393 billion in revenue in its fiscal 2030. His 12-month price target of $1,000 per share is based on the premise that Micron will trade at a price-to-earnings ratio of 10 in its fiscal 2030, and an earnings forecast for that year of $139 per share, discounted back three years at a 10% rate.

Is it time to buy Micron stock?

Luria's argument failed to win over investors, as Micron's stock actually sank on April 28, the day he published his note. However, I do think his reasoning is sound.

Micron trades at a forward price-to-earnings (P/E) ratio below 5 based on analysts' consensus estimates for its fiscal 2027, which ends in August 2027. That's for a company that last quarter saw its revenue nearly triple to $23.86 billion, while its gross margins surged from 36.8% to 74.4%. Meanwhile, management projected that its fiscal third-quarter revenue would climb from $9.3 billion a year ago to somewhere in the $32.75 billion to $34.25 billion range, with its gross margins continuing to expand to 81%. The only reason for a stock with that type of growth to trade at such a low multiple is that investors don't expect the growth to last long.

However, while the memory market has always been cyclical, there is reason to believe that this powerful boom phase for the DRAM (dynamic random access memory) segment will be enduring. HBM memory demand is tied directly to graphics processing unit (GPU) and other AI chip demand, as these powerful processors need to be packaged with this special form of DRAM. With demand for AI computing power seemingly insatiable, there likely will be no let-up in demand for HBM for quite some time.

Meanwhile, the DRAM market is dominated by just three companies, all of which are throwing most of their resources toward HBM. That's likely to keep the entire DRAM market in short supply and prices high into the foreseeable future.

With Micron trading at a low valuation multiple amid a boom cycle that could last much longer than has been typical in the memory market, it looks like an AI stock to buy.

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.