Memory chip manufacturer Micron technology (NASDAQ:MU) has a hot hand right now. Micron stock is trading near all-time highs, having gained 48% in 2024 and 93% over the past 52 weeks. The current artificial intelligence (AI) boom has added nitro to Micron’s growth fire and catapulted this stock chart into the stratosphere. Modern AI systems use a lot of memory and solid-state storage. As the leading provider of these chips, this is good news for Micron and its shareholders.
Long-time shareholders can look forward to some groundbreaking long-term returns. The stock has more than doubled S&P 500 Index gains over the last decade. But would this be a good time to take a new position at Micron?
Let’s see how much room there is for further Micron gains at this point.
Are Micron’s growth prospects measured in micrometers or miles?
The demand for Micron’s products is high.
Training and operating advanced AI systems requires intensive number crunching and requires massive amounts of short-term DRAM chips. These same systems also require a lot of long-term storage with fast read and write performance. The only sensible choice for this requirement is NAND chips, also known as flash memory or solid-state devices (SSDs).
Micron is not only a leading memory chip manufacturer, but also an innovator in the field with a current performance advantage. Unmatched performance per watt of power consumption makes Micron’s latest and greatest high-bandwidth storage solution attractive to very large system manufacturers Nvidia has selected this memory type as the standard DRAM in its next-generation AI accelerators.
Unit prices for NAND chips have remained stable in 2024, while the average spot price for mass-market DRAM chips has increased 11% year to date. Based on this solid base, industry leader Samsung expects NAND chip prices to rise 20% next quarter, and Micron’s technology advantage should allow the company to raise prices even faster.
Therefore, Micron’s growth prospects look excellent in the near term and I don’t expect the picture to change significantly in the next few years. Samsung and its friends could over time catch up to Micron’s HBM advantage, but that’s a long-term challenge.
Is Micron stock fairly valued?
And this is where things get uncomfortable.
Yes, every market trend is in a bullish direction. Unfortunately, the storage industry only recently recovered from the bottom of a brutal downturn. As a result, Micron’s trailing sales are down 43% compared to summer 2022 and free cash flows are sharply negative:
Earnings-based valuation metrics make no sense when earnings and cash flows are negative, but the ever-present price-to-sales ratio is at a level not seen since the dot-com bubble.
Final Verdict: You should probably choose another AI stock
I’m a long-time Micron shareholder and the cyclical nature of the memory industry should no longer surprise anyone.
But this radical upswing is not like the others. Micron’s valuation only makes sense if one expects structural changes in the memory chip sector as a whole. Specifically, Micron must maintain its technological lead in the long term as demand for high-end storage solutions continues to skyrocket.
It’s a bit much, even for me.
At this point, I’m seriously considering taking some Micron profits off the table to reinvest in cheaper growth stocks or a stable, index-tracking exchange-traded fund (ETF). Your mileage may vary and Micron may have a little more rocket fuel in the tank, but I just sleep better at night with less exposure to this highly valued stock.
Should you invest $1,000 in Micron Technology now?
Before you buy Micron Technology stock, consider the following:
The Motley Fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks so investors can buy it now… and Micron Technology wasn’t one of them. The ten stocks that made the cut could deliver huge returns in the years to come.
Think about when Nvidia created this list on April 15, 2005… if you have $1,000 invested at the time of our recommendation, You would have $522,969!*
Stock Advisor provides investors with an easy-to-understand roadmap to success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks per month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns from April 8, 2024
Anders Bylund holds positions at Micron Technology and Nvidia. The Motley Fool has positions in Nvidia and recommends it. The Motley Fool has a disclosure policy.
Is it too late to buy Micron Technology shares? was originally published by The Motley Fool