Micron: A Promising Contender in the Semiconductor Sector

In recent years, semiconductor stocks have become a popular investment theme. However, the focus has gradually narrowed to Nvidia (NVDA) and Broadcom (AVGO), whose stock prices remain near historical highs, leaving other players trailing behind.

The divergence in performance within the semiconductor sector is primarily due to differences in growth rates and visibility of future prospects. Investors have higher confidence in Nvidia, particularly in the increasing demand for high-performance chips used in artificial intelligence (AI). For those looking for potential surprises, Micron (MU) may be worth watching.

Supplying Nvidia

Micron specializes in producing and selling DRAM and NAND memory, which accounted for 76% and 23% of total revenue, respectively, in the quarter ending February 27 (Q2 FY2025).

· DRAM: A type of main memory technology widely used in personal computers, servers, mobile devices, and other computing systems. It loses data when powered off.

· NAND: A non-volatile memory technology used for data storage, retaining data even when power is cut. NAND is widely applied in SSDs, mobile devices, cameras, automotive electronics, and other applications.

Micron’s future outlook is closely linked to Nvidia, as its high-bandwidth memory (HBM) semiconductors are used in Nvidia’s H200 chips. Micron’s HBM3E offers a power consumption advantage, being 30% lower than competitors’ products, effectively supporting the growing demand for generative AI applications. Nvidia’s latest earnings report highlighted H200 chip sales as a key growth driver. Micron’s upcoming earnings report for the quarter ending May 2025 (Q3 FY2025), set to be released on June 25, is expected to reflect how data center growth has fueled demand for its products.

DRAM Prices Expected to Rise

Micron’s recent stock price increase has been driven not only by a broader market rebound since April but also by other favorable factors. For instance, some brokerages have raised their price targets:

· Mizuho: Maintains an "Outperform" rating and raised the target price from $124 to $130.

· UBS: Maintains a "Buy" rating and increased the target price from $92 to $120.

Additionally, in mid-May, Samsung Electronics announced an increase in DRAM prices, with DDR4 DRAM up by about 20% and DDR5 DRAM up by around 5%. According to global market research firm Omdia, Q1 global DRAM sales totaled $26.33 billion, down 9% quarter-on-quarter due to declining DRAM contract prices and lower HBM shipments. Against this backdrop, any ability by peers to raise prices is a positive sign, suggesting an improving operating environment.

Gross Margin Expected to Decline

Micron’s last quarter results showed revenue of $8.05 billion, up 38% year-on-year but down 8% quarter-on-quarter, beating the $7.9 billion market expectation. Adjusted EPS was $1.56, a 271% year-on-year increase and better than the $1.43 expectation.

· DRAM Sales: Declined by a high single-digit percentage quarter-on-quarter, while average selling prices rose by a mid-single-digit percentage.

· NAND Sales: Increased slightly quarter-on-quarter, but average selling prices fell by a high single-digit percentage.

By business segment, computing and networking contributed the highest revenue at $4.56 billion, accounting for 56.7% of total revenue, up 109% year-on-year and 4% quarter-on-quarter. It was the only segment with quarter-on-quarter growth (see Chart 1).

In Q2 FY2025, Micron’s gross margin stood at 37.9%, remaining relatively stable over recent quarters (see Chart 2). After releasing its quarterly results, Micron’s stock initially rose in after-hours trading. However, CFO Mark Murphy forecasted that gross margins for the quarter ending May 2025 would decline by several percentage points compared to the prior quarter, contrary to market expectations for stability. This led to an 8% stock price drop on March 21. The market now expects Q3 FY2025 gross margins to be 36.7%.

Although Micron’s stock price fell sharply following these events, recent gains driven by favorable factors mentioned earlier have brought the stock back to pre-earnings levels, marking a yearly high and displaying relatively strong performance.

Increasing Focus on Data Centers

Micron’s stock performance lags behind Nvidia for a clear reason: the memory industry is highly competitive. Although it involves a certain level of technical sophistication, it’s difficult to establish absolute competitive advantages. To capitalize on the AI boom, Micron has been shifting its business focus toward data centers.

In Q2 FY2025, data center DRAM revenue hit a new record. HBM revenue grew by over 50% quarter-on-quarter, reaching a new milestone with single-quarter revenue exceeding $1 billion. HBM shipments outpaced the company’s plans, demonstrating strong execution during the production ramp-up process.

Micron is also investing in expanding its HBM production capacity to meet demand through 2026. In January, the company broke ground on an advanced HBM packaging facility in Singapore, aiming to significantly expand its advanced packaging capacity by 2027.

Micron expects continued growth in HBM chip production and market share in 2025. The company forecasts Q3 FY2025 revenue at around $8.8 billion, representing a 29% year-on-year increase, above the $8.5 billion market expectation. Adjusted EPS is expected to be $1.57, also higher than the $1.47 market estimate.

Micron has stated that its forecasts do not account for potential new tariffs from the U.S. government, such as those proposed by former President Trump, due to uncertainties regarding timing, nature, and implementation. However, the company plans to pass on any additional costs to customers.

According to Bloomberg data, Micron’s current price-to-earnings (P/E) ratio is 20.6x, with FY2025 and FY2026 estimates at 15.4x and 9.8x, respectively. Compared to its historical levels and U.S. semiconductor peers, its P/E ratio is relatively low and comparable to that of Samsung Electronics. Analysts’ average 12-month target price for Micron is $123.8. Obviously, Micron has certain investment value.

By Tim Chen, MoneyClub financial writer

Having over 10 years of investment analysis experience and serving as a financial columnist.