Micron (NASDAQ: MU) is among the cheapest stocks in the market. It trades at just 5.2 times forward earnings on Oct. 29, a huge discount to the broader market. The S&P 500 (SNPINDEX: ^GSPC) trades for 19.2 times forward earnings, so it’s a huge mismatch, and the reason for the discount is rooted in Micron’s history.
Micron manufactures memory chips, and the industry is cyclical. Micron has a history of its business booming and busting, but with it going through its biggest boom ever, the downturn could be catastrophic. As a result, the market is valuing it at a discount. However, I think that’s misguided, as Micron is taking steps to reduce the magnitude of its eventual downturn. Furthermore, this downturn may not materialize for years, lending Micron ample time to deliver significant shareholder returns.
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The AI build-out isn’t ending anytime soon
Predicting when cycles will start and end is impossible. If it were easy, everyone would know when to pile into them and when to sell. However, investors can look for clues. If you listen to any of the big tech companies, about half say the AI build-out will last at least through 2030, and maybe longer. That’s a lot of time for companies like Micron to thrive, even if the stock market is pricing Micron’s stock as if a downturn is imminent.
Micron is also giving investors clues about market conditions. It told investors that the 2027 and 2028 memory chip markets will be even tighter than they were in 2026. 2026 was already bad enough, but two more years could cause prices for its chips to skyrocket even further, making it an even more attractive investment.
MU Revenue (Quarterly YOY Growth) data by YCharts.
Micron also has more production capacity coming online in mid-2027 through 2028, so even with more chips available, it won’t be enough to offset demand. With Micron able to produce more chips at higher prices, it could see significant growth again over the next few years.
That still doesn’t answer what Micron’s stock will look like if demand slips. However, management already has a plan in place for this.
Micron is starting to contract work
Because there isn’t much that separates one memory chip provider from another, most clients just sought the lowest price they could find. While that’s still the case, the prices are significantly elevated. Instead of letting the market dictate pricing, Micron is starting to enter into long-term supply agreements with its clients that set defined ceiling and floor prices on its products.
