Micron will be one of the biggest beneficiaries in the semiconductor industry of the multi-year growth opportunity driven by AI

Catalysts

• With the advancement of AI there will be high demand for High Bandwidth Memory (HBM) devices for AI data centres. Micron are in a strong position to serve AI demand for fast storage as these data-intensive applications proliferate. They have a robust roadmap for next generations of HBM which sells into AI applications. Micron has started a mass production ramp of these products. Also, Micron's DRAM products are incorporated into graphics processing unit-based data centre solutions. They have also started to sample a new NAND technology which enables industry leading performance for flagship handsets. This new NAND technology enables best-in class performance for artificial intelligence and other data-intensive use cases from personal devices and edge servers to enterprise and cloud data centres.
• Micron has invested to bring EUV technology to Japan for production over the next few years, with close support from the Japanese government. Micron expects to ramp EUV into production in Taiwan and Japan from 2025 onwards. The integration of EUV into its next node will play a key role in allowing the node to deliver faster, more power-efficient and higher-performance memory products.
• The company has now started shipping its 1-beta-based LPDDR5X memory to industrial, automotive and consumer customers across Asia, the U.S. and Europe. The memory delivers low power and performance for AI, intelligent vehicles and virtual reality.
• With the smallest cell size in the world, the forthcoming 1-gamma technology will pave the way for mass production of products required in complex applications from critical infrastructure to image processing networks.

Assumptions

• Micron will be one of the biggest beneficiaries in the semiconductor industry of the multi-year growth opportunity driven by AI, with expectations for continued leading-edge node tightness, they will continue to see increased interest from many customers across market segments to secure 2025 long-term agreements ahead of their typical schedule.
• With customer inventory starting to normalise, and industry-wide supply discipline Micron has set the stage for increased revenue, improved pricing and profitability.
• With ongoing demand growth, alongside enhanced product efficiency and reduced production costs, net margins will improve.
• I expect Micron to generate multiple billion dollars of revenue from HBM in fiscal 2025, having already seen several hundred million dollars of revenue generated in fiscal 2024. Pricing has already been contracted for the overwhelming majority of 2025.

Risks

• Micron has a high fixed cost base, leaving it vulnerable to underutilisation charges and major profit compression when memory markets enter a downturn.
• As Micron's sales are highly cyclical, with NAND and DRAM memory chips pricing being governed by global supply and demand. Fiscal 2023 represented one of the most severe downturns the chipmaker has seen, with gluts of chip supply for data centres, smartphones, and PCs following post-pandemic demand.
• Due to volatile industry conditions, customers are reluctant to enter into long-term fixed-priced purchase contracts. Agreements are made with acknowledgment that pricing, quantity, and other terms will be periodically negotiated to reflect market conditions and Micron's customer's demands for their products.
• Micron face intense competition in the semiconductor memory and storage markets and they must remain competitive by continually developing and implementing new products and technologies as well as decreasing manufacturing costs.
• Delay in the initiation of new U.S. projects until the latter half of the decade might strain Micron's ability to ramp up.
• Significant investments in HBM and production might lead to higher operational costs and pressures on net margins.
• Micron's planned lean inventories through 2026 could make it vulnerable to swift changes in market demand, thereby impacting revenue and earnings.
• Restructure plans may not realize expected savings or other benefits.
• Claims that Micron's products or manufacturing processes infringe or otherwise violate the intellectual property rights of others or failure to obtain or renew license agreements covering such intellectual property.
• Impacts of government actions and compliance with tariffs, trade restrictions, and/or trade regulations.

Valuation

• Expected revenues in 3 years (2027) will be approximately 43b dollars with earnings of 11b, helped by enhanced product efficiency and reduced production costs resulting in improved net margins. This is in line with analysts who are in agreement with the projections.
• In order for the above numbers, the company's revenue would need to grow at 26% annually over the next 3 years. Profit margins would need to increase by 25% annually, up from -7% today, and they would need to trade at a PE ratio of 21x on those 2027 earnings, up from -78x today. This future PE of 21x is lower than the US Semiconductor industry PE of 30x, so my figures could be conservative.
• In summary, I believe Micron is priced at a 32% discount on my fair value calculation of 160 dollars per share, thereby delivering a huge opportunity with Micron at the current price.