Micron Stock Is Down 39% From Its High. History Suggests a $5,000 Investment Now Will Be Worth This Much by Mid-2028.

Micron Technology (NASDAQ: MU) has been one of the biggest beneficiaries of the booming demand for artificial intelligence (AI) compute. It's one of just a handful of companies that make memory chips, which have proven to be one of the biggest bottlenecks to expanding large language models and improving their performance. The company has seen its profit soar during the past few quarters as hyperscalers pay premium prices for its chips.

But the market has sold off Micron along with other semiconductor stocks since late June due to a mix of concerns about returns on AI spending and macroeconomic trends. The stock has fallen as much as 39% from its high. As a result, some investors may see an opportunity to invest in the stock. Here's what a $5,000 investment today could be worth in about two years.

Image source: Micron Technologies.

How much higher can Micron's earnings climb?

As mentioned, Micron has seen its earnings soar in recent quarters due to higher prices for its memory chips. Prices climbed more than 60% on average compared to just three months prior during its fiscal third quarter (ended May 28).

The reason it can raise prices so much is that the market can absorb it. Hyperscalers have committed to hundreds of billions of dollars in capital expenditures this year alone. They've signed contracts to take hundreds of billions more in chips, infrastructure, and energy services during the next few years. The huge demand severely outstrips the current supply of memory chips across the entire industry, and Micron's management doesn't expect that shortage to abate until 2028 at the earliest.

But more supply is coming. Micron will spend more than $250 billion adding manufacturing capacity during the next decade. Its Virginia facility recently began producing legacy DRAM chips. Its first Idaho facility will begin producing high-end chips in mid-2027, with another facility coming in late 2028. Its New York facility broke ground this year and could start production in 2030.

The competition is also adding capacity. SK Hynix and Samsung are combining to spend more than $1.3 trillion on production facilities during the next decade. Both are adding capacity to existing facilities and accelerating new fabrication plants that could increase production significantly by 2028. Additionally, Chinese competitor CXMT recently completed its initial public offering (IPO), raising up to $10 billion to expand its DRAM production capacity.

As more production capacity comes online, price increases will slow and eventually drop. Revenue growth will slow, and operating costs will rise as Micron and the competition invest more in production. That will lead to an earnings decline. The drop could be more severe if there's an oversupply, which could worsen if AI spending doesn't continue climbing as expected. As it stands, analysts expect Micron's earnings to peak in 2028 at about $178 per share. That's nearly 2.5 times the earnings estimated for fiscal 2026.

How much will a $5,000 investment today be worth in two years?

Micron shares historically trade between 3 and 8 times earnings depending on the company's cyclical earnings peaks. That's because investors become increasingly aware of the potential drop in profit during the coming quarters as Micron approaches the peak of the cycle. A low-single-digit earnings multiple will quickly turn into a very high earnings multiple in the near future as earnings fall.

That's quite a wide range, though, and the multiple depends on how severe investors expect the drop in earnings will be. Micron and its competitors have taken steps to alleviate the cyclicality of their businesses by signing long-term agreements with some of their customers. Micron says its agreements cover about 20% of its DRAM volume and a third of its NAND volume from last quarter, and it's looking to sign more. That puts a floor on its volume and pricing in the future (and a ceiling on it in the present).

As such, Micron likely won't trade for a multiple at the low end by the time it hits its peak. A multiple in the middle, about 5 or 6 times earnings, is a fair estimate. That would put its stock price at about $1,000 by mid-2028. With the stock recently trading for just $740 per share, a $5,000 investment could be worth about $6,750 in two years.

To be sure, there's a broad range of possible outcomes. Personally, I want a wider margin of safety before buying Micron shares due to the high level of uncertainty facing the company. But for investors who think the current cycle could push earnings even higher or last longer than analysts currently expect, or that the downcycle won't be too severe, right now could be an opportunity to add shares.

Adam Levy 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.