Investment Memo: MU

1. Executive Summary

Micron Technology is at the epicenter of the most significant technological shift since the dawn of the internet: the Artificial Intelligence revolution. The insatiable demand for high-bandwidth memory (HBM), a critical component in AI accelerators, has ignited a supercycle in the memory industry, and Micron is uniquely positioned to capitalize on this trend. Our bullish thesis is predicated on three key pillars: Micron's technological leadership in HBM3e, the secular growth in AI-driven demand transforming the historically cyclical memory market, and a favorable pricing environment that we believe will persist for the foreseeable future.

The market's primary concern, and the reason for the stock's relatively modest valuation, is the deep-seated memory of painful, wealth-destroying boom-and-bust cycles in the DRAM and NAND markets. However, we contend that this historical lens is distorting the view of the present reality. The AI-driven demand for HBM is not a cyclical phenomenon tied to PC or smartphone upgrade cycles; it is a secular one, driven by a global arms race among hyperscalers and enterprises to build out foundational AI infrastructure. This creates a more durable and predictable demand profile that will structurally dampen the industry's historical volatility.

Our variant perception is that the market is underestimating the duration and magnitude of this HBM supercycle and, consequently, Micron's transformed earnings power. While consensus acknowledges the current strength, it remains skeptical of its longevity. We believe the market is failing to price in the widening of Micron's competitive moat, driven by the increasing technological complexity of leading-edge memory, and the strategic importance of being the sole U.S.-based manufacturer of these critical components. While the stock has had a strong run, we believe there is still significant upside as Micron executes on its capacity expansion plans and the market is forced to re-rate the stock from a cyclical commodity producer to a secular growth story. We are initiating a "Buy" recommendation with a $150 price target, representing a 25% upside from the current price.

2. The Scoreboard

3. Business Overview

Micron Technology is a world leader in innovative memory and storage solutions, and the only memory manufacturer based in the United States. The company's portfolio of high-performance DRAM, NAND, and NOR Flash memory products is foundational to a vast array of modern technologies, including data centers, personal computers, smartphones, and increasingly complex automotive systems. Micron's business is organized into four primary segments:

• Compute and Networking Business Unit (CNBU): This is the largest segment, providing memory products for cloud server, enterprise, graphics, and networking markets. It is the primary beneficiary of the AI boom, as this is where HBM and other high-performance server DRAM products reside.
• Mobile Business Unit (MBU): Provides managed NAND, LPDRAM, and discrete DRAM and NAND for the smartphone and other mobile-device markets. While a historically important segment, it is currently being overshadowed by the growth in CNBU.
• Storage Business Unit (SBU): Provides SSDs based on NAND technology for the enterprise, cloud, and client markets. This segment is also benefiting from the growth in data center buildouts.
• Embedded Business Unit (EBU): Provides memory and storage products for the automotive, industrial, and consumer markets. The increasing silicon content in vehicles makes this a key long-term growth vector.

In fiscal 2025, Micron achieved a landmark performance, with revenues growing nearly 50% to a record $37.4 billion. This growth was not uniform; it was spearheaded by a more than five-fold increase in revenue from high-value data center products, including HBM, high-capacity DIMMs, and server DRAM, which collectively reached $10 billion. This highlights the company's successful pivot to becoming a key enabler of the AI revolution.

The Moat (Competitive Advantage)

Rating: Narrow (Improving to Wide) Source: Intangible Assets (Proprietary Technology & Manufacturing Know-How)

Micron's competitive moat is derived from its technological leadership, particularly in the most advanced memory nodes. The memory industry is effectively an oligopoly, with Micron, Samsung, and SK Hynix controlling the vast majority of the market. The capital intensity and technical expertise required to build and operate a leading-edge fabrication plant create an enormous barrier to entry. A new fab can cost upwards of $15-20 billion, a cost that is prohibitive for all but a few players.

We believe Micron's moat is actively widening. The increasing complexity of memory manufacturing, especially for products like HBM which involve stacking multiple DRAM dies, is raising the bar for competitors. Micron's technical lead in HBM3e provides a significant, high-margin advantage in the most critical segment of the AI market. This is not just a lead in performance, but also in power efficiency, a crucial metric for hyperscale data center operators.

Furthermore, Micron's close collaboration with AI leaders like Nvidia creates a virtuous cycle. Micron gains deep insights into the future requirements of AI hardware, allowing it to align its R&D roadmap with the needs of its most important customers. This co-development model solidifies its position and makes it difficult for customers to switch suppliers, adding a layer of switching costs to its moat. Finally, its position as the only US-based manufacturer provides a geopolitical advantage, insulating it from certain trade tensions and making it a strategic partner for the US government and domestic hyperscalers.

4. The Investment Thesis

Our investment thesis is centered on the belief that the market is fundamentally mispricing Micron. The stock is still being valued as a cyclical commodity producer, when it has transformed into a strategic enabler of the AI revolution with a more durable earnings stream.

Point 1: The AI Supercycle is a Secular, Not Cyclical, Driver

The demand for HBM is not a temporary blip; it is a secular trend that will persist for years to come. The world's largest technology companies are investing hundreds of billions of dollars in AI infrastructure, and HBM is a critical bottleneck in this buildout. Unlike previous memory cycles driven by unit growth in PCs or smartphones, the AI cycle is driven by content growth – the amount of memory per accelerator. An Nvidia H200 GPU, for example, uses 141GB of HBM3e. The next-generation Blackwell platform will require even more. This demand is far more resilient than consumer-driven cycles. We project that the HBM market will grow at a 40-50% CAGR for the next five years. As the current technology and performance leader, Micron is poised to capture a disproportionate share of this growth and the associated profits. The company's strategic investments in specialized solutions for AI, automotive, and data center applications position it to capture sustainable growth in these premium-margin markets.

Point 2: Sustained Pricing Power and Structural Margin Expansion

The tight supply-demand balance in the HBM market is giving Micron significant and durable pricing power. We expect HBM prices to remain elevated for the foreseeable future, which will drive significant, structural margin expansion. The expansion of gross margins by 17 percentage points to 41% in fiscal 2025 is a testament to this new reality. This is not just a cyclical peak. The manufacturing complexity of HBM limits the ability of the industry to add supply quickly, while demand continues to surge. This dynamic should prevent the kind of rapid price erosion seen in previous cycles.

This pricing power is not limited to the HBM market. The strong demand for HBM is also having a positive spillover effect on the broader DRAM market. As wafer capacity is reallocated to the more lucrative HBM production, it constrains the supply of conventional DRAM, creating a more favorable pricing environment for all of Micron's products. This disciplined capital allocation, focused on the highest-value segments, is a key reason for our confidence in sustained margin improvement.

Variant Perception (The "Edge")

The consensus view is anchored in the past, viewing the current upswing through the lens of historical, and often brutal, memory cycles. The fear is that the current boom will inevitably be followed by a bust as supply catches up and prices collapse.

Consensus View:

Our View:

5. Financial Deep Dive

Micron's financial performance in fiscal 2025 was a watershed moment, demonstrating the leverage in its model and the impact of its strategic focus on high-value products. The nearly 50% revenue growth to $37.4 billion was remarkable. The quality of this revenue is high, driven by long-term agreements with hyperscalers and a product mix shifting decisively towards higher-margin data center solutions.

The 1700 basis point expansion in gross margin to 41% is the clearest evidence of the company's newfound pricing power and operational efficiency. We believe this is a new sustainable floor, not a cyclical peak. Free cash flow has turned positive, even as the company maintains a robust and prudent capital expenditure plan to fund its HBM capacity expansion. This ability to self-fund growth is a key pillar of a healthy balance sheet and reduces reliance on capital markets. The company's Return on Invested Capital (ROIC) has surged to approximately 18%, well above its weighted average cost of capital (WACC), indicating significant value creation for shareholders.

Looking forward, we expect capital expenditures to remain elevated as Micron invests to maintain its technology lead and meet HBM demand. However, we are confident that these investments will generate high returns. The company's disciplined approach ensures it will not repeat the mistakes of past cycles by indiscriminately adding capacity. Instead, it is focusing investments where it has a clear technological and competitive advantage.

6. Valuation

Methodology: Forward P/E Fair Value Estimate: $150

We are valuing Micron at 15x our fiscal 2026 earnings estimate of $10.00 per share. We believe this multiple, while a premium to the company's historical trading range, is justified. The market has historically valued Micron as a commodity hardware company, with a P/E ratio often in the single digits. We argue that this is no longer appropriate. The company's transformation into a key enabler of the secular AI growth trend warrants a higher, more stable multiple, akin to other semiconductor companies with strong competitive moats and secular growth drivers.

Our $150 price target is the base case in our scenario analysis:

• Bull Case (Price Target $200): The AI supercycle exceeds expectations, and Micron extends its technology lead in HBM4. Competitors falter in their ramps, leading to an even more favorable supply/demand dynamic. Gross margins expand towards 50%, and the market re-rates the stock to a 20x multiple.
• Bear Case (Price Target $100): A slowdown in AI spending or a surprisingly rapid ramp of HBM capacity from competitors leads to price erosion. The memory market reverts to its old cyclical patterns, and the stock's multiple contracts back to the historical average of 10x earnings.

7. Pre-Mortem (Risks)

While we are bullish, a clear-eyed view of the risks is essential. Assume the investment fails and the stock is trading at $80 in two years. What went wrong?

1. Risk A: Oversupply & The Cyclical Ghost (Probability: Medium): Our thesis is predicated on the idea that "this time is different." The biggest risk is that it is not. Spurred by massive profits, Micron and its competitors could collectively over-invest in new fabrication capacity. If AI demand proves less durable than expected or if there is a global recession, the market could be flooded with memory, causing a catastrophic collapse in prices and margins, just as it has in past cycles.

2. Risk B: Intensifying & State-Sponsored Competition (Probability: Medium): Micron faces intense competition from South Korea's Samsung and SK Hynix. Furthermore, China has made semiconductor independence a national priority. While Chinese competitors are currently several generations behind on the technology curve, massive state subsidies could allow them to flood the market with lower-end DRAM and NAND, disrupting the overall market pricing, even if they can't compete directly in HBM. An intensified pricing war from competitors could erode Micron's ability to maintain its premium profit margins.

3. Risk C: Geopolitical Shocks & Supply Chain Risk (Probability: Low-Medium): As the sole U.S. manufacturer, Micron has a geopolitical advantage, but it is not immune to risk. A significant portion of the semiconductor supply chain, including manufacturing and packaging, is concentrated in Asia, particularly Taiwan. Any geopolitical conflict in this region could severely disrupt Micron's operations. Furthermore, potential trade restrictions or tariffs on critical semiconductor technology or materials could impact its global operations and ability to serve key customers.

8. Conclusion & Action

Micron Technology represents a compelling investment opportunity to gain exposure to the secular growth of Artificial Intelligence. The company's technological leadership in the critical HBM market provides a significant and widening competitive moat. We believe the market is overly anchored to the company's cyclical past and is failing to appreciate the structural changes that have transformed its earnings power and reduced its volatility. We recommend initiating a position at current levels.

Action: Buy MU stock with a 12-18 month price target of $150. Consider a stop loss below the 200-day moving average, currently around $105, to manage downside risk.

Disclaimer: Internal research only. Not financial advice.