r/valueinvesting
Micron ($MU): AI has raised the floor but has it killed the memory cycle?
Author questions Micron's valuation, arguing its boom is driven by pricing not volume, warning of a cyclical peak despite AI HBM demand.
- AI has created enormous demand for high-bandwidth memory (HBM).
- Micron is volume-shipping HBM4 to NVIDIA and deeply integrated into customer roadmaps.
- Business fundamentals have clearly improved, raising the cyclical floor.
- Recent revenue acceleration is mainly driven by pricing (DRAM/NAND price hikes), not volume growth.
- Historically, low multiples in memory stocks often signal a cyclical peak rather than undervaluation.
- Past cycles prove that revenue and FCF can collapse rapidly when pricing and demand shift.
Hi guys, I'd appreciate it if you shared your thoughts about the valuation of Micron. I know it's not a value stock right now but I hope the subreddit is suitable for a general valuation discussion, reverse DCF models etc... as well. Can be deleted if not.
Intro
Micron is perhaps in the strongest position in its history and indeed the stock has been priced in that way.
Memory stocks have historically created a dangerous optical illusion where near the bottom of the cycle, earnings disappear and the stocks look expensive and near the top, pricing rises faster than costs, margins explode, and the stocks suddenly trade at seemingly irresistible multiples.
Historically, that low multiple has often been a warning that earnings are near a cyclical peak and not really proof of undervaluation.
The difference in the field today, Micron included, is that the bull case is real.
AI has created enormous demand for high-bandwidth memory where Micron is now volume-shipping HBM4 for NVIDIA, expanding data-centre products, and becoming more deeply integrated into customer roadmaps. The business has clearly improved but the question is whether it has improved enough to justify the current valuation...
The key problem: Most of the current boom is pricing
Micron’s recent results are extraordinary, but the acceleration came mainly from higher selling prices.
Sequential DRAM prices increased in the mid-60% range, while NAND prices rose in the high-70% range. Bit shipments grew much more modestly. I thibk that's important because Micron has been here before.
In fiscal 2018, it generated $30.4 billion of revenue and $9.2 billion of adjusted free cash flow. Then by fiscal 2023, revenue had almost halved, operating margin was negative 37%, and adjusted FCF had fallen to negative $5.5 billion.
The products still remained essential but supply, demand and pricing changed.
What the valuation requires
At the valuation used in my analysis, Micron’s enterprise value was approximately $1.36 trillion.
Using a 9% discount rate and 2% perpetual growth, that corresponds to roughly:
$95 billion of sustainable annual FCFF
For context:
• Previous full-year adjusted-FCF record: $9.2 billion
• 10-year average through fiscal 2025: about $1.9 billion
• Annualised fiscal Q2 2026 adjusted FCF: about $27.6 billion
At a normalised 30% FCFF margin, $95 billion of annual cash flow would require approximately:
$317 billion of annual revenue
That is more than 8 times Micron’s fiscal 2025 revenue.
The market is clearly pricing in a fundamentally different company, not just another strong memory cycle.
Why Bulls aren't crazy but Bears are not crazy either
HBM is harder to manufacture than ordinary DRAM. It requires advanced packaging, stacked dies, high yields lengthy customer qualification,...
It also consumes disproportionate wafer capacity, which can tighten the broader DRAM market.
Micron is more technologically capable, more exposed to data centres and more strategically important than during previous cycles.
On the other hand, bear case doesn't require AI demand to collapse but rather "only" supply to respond.
Micron, Samsung and SK hynix are all expanding capacity. New supply takes years to arrive, so the shortage may continue, but eventually more capacity could restore customer choice and weaken pricing.
We've seen that story before and just because the floor raised, doesn't mean it's not the same room anymore.
Micron’s exceptional margins are also not limited to HBM. Its Mobile and Client segment recently produced a 79% non-GAAP gross margin, suggesting a broad scarcity premium across conventional memory as well.
My 4 scenarios the shortage could end
Ny scenarios all assume that AI demand remains strong.
What changes is how much of today’s pricing power survives, how much supply enters the market, and how long elevated growth continues beyond fiscal 2030.
(illustrative operating scenarios, not precise forecasts)
Scenario A: The traditional cycle returns
Micron remains relevant to AI, but new capacity eventually weakens pricing across HBM, conventional DRAM, and NAND.
Revenue falls from its peak while depreciation and capital intensity remain elevated.
Illustrative assumptions:
Fiscal 2030 revenue: approximately $95 billion
Fiscal 2030 FCFF: approximately $8 billion
Fiscal 2035 revenue: approximately $130 billion
Fiscal 2035 FCFF: approximately $17 billion
Estimated enterprise value: approximately $200 billion
Estimated equity value: roughly $183 per share
This is a scenario in which investors paid a permanently different valuation for what ultimately remained a cyclical scarcity business, not an “AI was fake” scenario.
This scenario supports approximately 15% of the June 22 enterprise value.
Scenario B: Micron establishes a much higher floor
HBM consumes enough capacity to keep conventional DRAM structurally tighter. Industry discipline improves, and Micron becomes significantly more oriented toward data-centre products.
Assumptions:
Fiscal 2030 revenue: approximately $165 billion
Fiscal 2030 FCFF: $40 billion
Fiscal 2035 revenue: $207 billion
Fiscal 2035 FCFF: $52 billion
Estimated enterprise value: $616 billion
Estimated equity value: roughly $552 per share
This would represent an extraordinary improvement over Micron’s historical economics yet it would still support only around 45% of the June 22 enterprise value.
Scenario C: A genuinely new Micron
Micron becomes a major long-term AI-memory supplier with durable HBM exposure.
Advanced server memory and data-centre storage support structurally higher scale and margins, although the business retains some cyclicality.
Assumptions:
Fiscal 2030 revenue: $235 billion
Fiscal 2030 FCFF: $71 billion
Fiscal 2035 revenue: $349 billion
Fiscal 2035 FCFF: $94 billion
Estimated enterprise value: $1.10 trillion
Estimated equity value: roughly $978 per share
This is already an aggressively bullish operating outcome. Even so, it supports approximately 81% of the June 22 enterprise value.
Scenario D: The market-implied AI-memory champion
This is one potential operating path that closes the valuation gap. Micron becomes a technological peer or leader across major HBM generations. AI infrastructure spending remains exceptional and HBM continues consuming disproportionate wafer capacity. Here, Micron sustains elevated growth well beyond 2030.
Assumptions:
Fiscal 2030 revenue: $270 billion
Fiscal 2030 FCFF: $84 billion
Fiscal 2035 revenue: $438 billion
Fiscal 2035 FCFF: $118 billion
This scenario supports the full enterprise value of approximately $1.36 trillion.
The market doesn't necessarily require Micron to maintain peak margins forever, but it does require the company to become radically larger, generate exceptional cash flows for most of the next decade, and avoid anything resembling its historical cycle.
My view
I think AI and HBM have materially raised Micron’s through-cycle earnings power but i am less convinced they have abolished the memory cycle.
Micron may remain a much stronger company than it has ever been while still falling short of what the valuation requires.
The company has probably raised the floor yet the market appears to be pricing it as though the company has removed the ceiling. Personally I think that based on the valuation and my analysis, Micron will end up somewhere between the B and C scenario, probably closer to the B one.
Today's results can test execution, pricing and cash conversion but rhey cannot settle the larger question of whether Micron’s current economics survive once supply catches up and memory pricing normalises...
So, the question for the discussion is: has HBM permanently changed Micron’s economics, or are investors once again valuing a memory producer near the top of a shortage?
What do you think?
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(i don't want to promote, nor you need to follow me anywhere but in the previous posts, people talked about me pulling final/end numbers out of my bottom, so here's the longer version of the analysis with models in greater detail and visuals for anyone interested. No paywall, not essential to read for the purpose of the discussion here: https://open.substack.com/pub/hatedmoats/p/micron-what-happens-after-the-shortage)
As soon as hyperscalers cut capex the hype will stop, as simple as that, no need for lengthy analysis
This is simple yet effective statement, people thinking hyperscalers already transferred billions of dollars worth of capex in chips and memory companies' accounts already don't understand cash conversion cycle, orders can get cancel or delayed. 🤦♂️🤦♂️
The biggest flaw in this statement is you assume AI is temporary and optional.
Capex continues to increase, not decrease. Hyperscalers cannot afford to stop.
People on these subs love to overcomplicate simple things and over simplify complex things
I think that’s human nature in general.
Can you summarize this in 3 or 4 sentences?
Nice and very popular topic. I have a couple of opinions there.
First off, HBM was never a low margin product. Price for HBM always had a premium associated with it, simply because it is VERY HARD to make it. What was true historically (and not any more) is that it used to be a small portion of the overall revenue, as regular DRAM which is priced as a commodity still dominated the sales. This is rapidly changing now. Increasingly more revenue will be coming from a higher margin product (similar to Amazon with AWS). So the cycle floor or baseline for HBM makers will never be the same even if the supply meets the demand at some point.
Second, memories used to scale with device usage “per capita”. They were not necessarily infrastructure components. They are the infrastructure components now, and building and maintaining that infrastructure is for the first time decoupling them from per-capita limitations in terms of demand.
Another important thing is that memory makers have quietly build an impenetrable moat over the decades. If 20 years ago it was an “easy to make” commodity with some investment and “know-how”, over the decades it has become more complex, more capital intensive, and just engineering wise and R&D-wise incredibly difficult. And that is importan lt because it changes who is in position of power. If previously Apple could come and demand whatever price they wanted for DRAM. Even Apple is not going to be in that position anymore. The cards are now in the hands if Micron/Samsung/SK-Hynix, as you absolutely can’t even think of reproducing what they have done somewhere else.
All that being said, the cycle is inevitable. Whoever tells you it’s not, is delusional. They will increase capacity, and the capacity will meet the demand at some point in time. When that happens, the prices will drop and stabilize, and their valuation will correct. However, you can’t build memory capacity in a year. It will take years for that to happen. Anyone who has ever seen a memory fab will understand why.
Once we are out of the cycle, if they play this smartly I do think Micron and SK will be transformed into different companies. Companies that historically have been sitting on a commodity, will now be sitting at a technology infrastructure bottleneck (one of them at least). It is a very different power position to find youself in.
Very detailed analysis thank you
Great points.
Another post written by AI, Is this just proving dead internet theory
Hmmm, other than the intro and outro it seems odd that OP would choose to format the rest of this post in an identical layout to what an LLM would produce then
What we currently see is greed by everyone. People are no longer happy with companies growing at 5-15%
Warren Buffet has a quote on this be fearful when others are greedy and greedy when others are fearful
He has a barometer of stocks and we are in the grewd cycle at the moment.
It may carry on next year who knows. Or there may be pullback
Fundamentals will never go out of fashion, just because there is shiny looking Kia coming in market, that doesn't mean its better then camry, which can do millions of kms without a sweat.
Noone knows. The best guess I have is that they’ll take some of the lower-end commodity side of DRAM and NAND at some point and put pressure on prices there. Which will be an even bigger incentive for Micron, SK and Samsung to focus more on HBM, as HBM is much higher margin. But right now they need to be careful not to put too much emphasis on HBM, because if AI capex frenzy gets slashed, they could be cought swimming naked as for most other applications conventional DRAM is good enough. But they know this and are being careful about it. Micron mentiones this in every earnings report.
This is just my opinion. I never suggested this is a great price point to buy or invest in neither of these. Im also not in a position to push anything, it’s just a post on Reddit. Chill.