Key Points

Micron benefits from elevated DRAM and NAND pricing fueled by AI infrastructure expansion.
The shares appear undervalued, with the firm securing extended contracts.

Micron Technology (NASDAQ: MU) delivered another impressive quarter with its fiscal third-quarter earnings released after market close on June 24. Although the share price rose initially, gains have mostly reversed. Year-to-date, the stock has advanced approximately 236%.

Examining the memory producer's performance and future outlook helps determine if this AI-related stock merits purchase.

Micron performs strongly across segments

Micron ranks among the top three DRAM producers and profits from rising prices in DRAM and NAND memory due to limited supply amid data center expansions. DRAM accounts for over 75% of revenue, with NAND comprising most of the balance.

The DRAM sector grows due to demand for high-bandwidth memory integrated with AI processors like GPUs for better efficiency. The expanding inference sector requires even more memory than training, boosting demand. Micron's HBM capacity is fully committed through 2027 and into 2028, projecting a $100 billion market by 2027.

The company highlighted that demand for DRAM and NAND will exceed supply. Supply issues for HBM and DRAM are particularly acute. It increased its capex to $27 billion for the fiscal year to build new facilities.

In the fiscal third quarter, revenue rose from $9.3 billion to $41.5 billion, exceeding the $35.8 billion analyst consensus from LSEG.

Cloud memory revenue quadrupled to $13.8 billion, core data center from $1.5 billion to $11.5 billion, mobile from $3.3 billion to $11.5 billion, and automotive/embedded from $1.1 billion to $4.6 billion. Gross margins reached 84.6%, compared to 37.7% previously and 74.4% in Q2.

Adjusted EPS was $24.67 versus $1.68 last year, surpassing the expected $20.78.

For Q4, guidance includes revenue near $50 billion, gross margins about 86%, and adjusted EPS around $30.73.

Evaluating Micron stock as an investment

Even with revenue growth and margin improvements, Micron trades at a forward P/E of 7 times fiscal 2027 estimates. While cyclical, about 40% of revenue is now under long-term agreements. Memory supply-demand balance seems unlikely soon due to AI spending.

Thus, the stock offers value currently.