Micron's Data Center Gross Margin Hit 87% Last Quarter. Here's What It Means for the Stock.

Micron Technology (NASDAQ: MU) just reported a gross margin most software companies would envy, and it came from a business that stamps out physical memory chips. In its core data center unit, gross margin reached 87% last quarter.

For a company long treated as the poster child for commodity boom-and-bust cycles, that number is stunning. It is also the clearest sign yet that memory has become one of the scarcest, most valuable inputs in artificial intelligence (AI).

While the 87% margin is the headline, the more important question for the stock is how durable that pricing power is, and, at today's price, whether the market believes it can last at all.

Imag source: Getty Images.

A number that rewrites the story

In its fiscal third quarter of 2026 (the period ended May 28, 2026), Micron's core data center business generated record revenue of $11.5 billion. That was up 103% from the prior quarter, and the unit now accounts for about 28% of the whole company. Gross margin there expanded roughly 12 percentage points in a single quarter to 87%.

Put another way, that one segment is now running above a $45 billion annual pace, up from a roughly $6 billion annual pace a year ago.

The strength wasn't confined to one corner of the business. Companywide revenue set a record at about $41.5 billion, up a staggering 346% year over year from $9.3 billion, and non-GAAP (adjusted) earnings per share hit a record $25.11.

What drove the margin was price, not just volume. Memory prices have soared as artificial intelligence has strained supply. Micron's newest high-bandwidth memory (HBM), the dense chips stacked beside AI processors, has already shipped more than $1 billion of its latest generation. That product is ramping about twice as fast as the one before it, and its entire 2026 supply is already sold out under multi-year agreements.

Management said industry demand for DRAM and NAND memory continues to run well ahead of supply, and it expects those tight conditions to persist beyond 2027. That is the sort of visibility a commodity chipmaker almost never gets.

That backdrop points to enormous near-term earnings power. Micron guided for fiscal fourth-quarter revenue of about $50 billion at a gross margin near 86%, which would stretch the run of records at least one quarter further.

The market isn't convinced it lasts

And yet the stock tells a far more skeptical story. Even after jumping more than 8% today as of this writing, as Micron raised its planned U.S. investment to more than $250 billion through 2035 -- and despite the record results -- Micron shares still trade at less than 7 times the earnings analysts expect over the next 12 months. This is well under a third of the S&P 500's roughly 25 times earnings.

A multiple that low usually signals that investors expect earnings growth to eventually stall and even start to decline. And this checks out. Memory has always been cyclical. Historically, capacity eventually catches up, prices roll over, and a fat margin narrows quickly.

In short: Investors have watched that movie enough times to price Micron as though the boom is borrowed time -- even as it prints the best numbers in its history.

The bull case is that this cycle breaks the old pattern. HBM is far harder to make than commodity memory. And bringing new capacity online can take years, which could keep supply tight well after past cycles would have cracked.

Personally, I think the truth sits somewhere in the middle. The 87% data center margin is almost certainly a peak rather than a baseline, and I wouldn't bet on it holding for years to come.

But a stock priced at less than 7 times forward earnings doesn't need the peak to last. It just needs the eventual downturn to be milder, or to arrive later, than the market is currently assuming.

At about $1,026 as of this writing, Micron looks cheap if AI keeps memory tight into 2027 and beyond. But the stock could look expensive in hindsight if the cycle turns.

That makes it a bet on timing more than on how impressive the margin is. The record margin tells you the boom is here. The single-digit multiple tells you the market still expects it to end. For investors comfortable with the volatility, it's arguably one of the more compelling ways to play the memory boom. But it's a deeply cyclical stock, and I'd want to own it in a size I could stomach through the next downturn.

Daniel Sparks and his clients have 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.