After a 40% surge, Micron needs guidance that exceeds expectations to prove its valuation is justified

On Tuesday after the U.S. stock market, Micron Technology will release its earnings report, and the market will closely watch whether this memory chip manufacturer can provide sufficiently strong performance guidance to support its nearly 40% astonishing increase in September.

Wall Street expects Micron to give an optimistic forecast for its high-bandwidth memory chip business, a key component in the construction of artificial intelligence infrastructure. As large companies like Oracle reaffirm their commitment to AI investments, and NVIDIA invests in OpenAI to support more AI infrastructure development, related demand continues to rise.

Driven by this, traditionally relatively quiet segments of the tech industry, such as memory and storage, have become the center of AI optimism, with companies like Seagate Technology, Western Digital, and SanDisk seeing their stock prices rise significantly alongside Micron in September.

Investors generally believe that whether Micron can provide performance guidance that exceeds market expectations will determine its stock price trend. Daniel Morgan, Senior Portfolio Manager at Synovus Trust, stated:

The key lies in the guidance; any statements that exceed consensus expectations will trigger a comprehensive enthusiastic response.

Earnings Expectations Significantly Improve

The market expects Micron's earnings per share for the fourth fiscal quarter (ending August 31) to be $2.65, with revenue of $11.2 billion, a significant increase from last year's earnings per share of $0.79 and revenue of $7.8 billion. The company raised its expectations last month, citing improvements in DRAM chip pricing.

For the full fiscal year, Micron's net earnings per share are expected to rise to $7.42, with revenue reaching $37 billion, compared to $0.70 and $25 billion for fiscal year 2024. Last year's earnings report was a watershed moment for Micron, as its optimistic outlook drove the stock price to its best single-day performance in 13 years.

Morgan pointed out:

Micron has achieved profitability for six consecutive quarters, and typically these DRAM cycles last six to eight quarters. If this earnings report can provide reliable expectations for 2026, it may indicate that the AI boom will extend the cycle beyond what we typically see.

Valuation Still Appears Cheap but There Are Discrepancies

Micron's stock price closed at $164.62 on Monday, slightly above Wall Street's 12-month target price of $162.46.

Despite Micron's stock price soaring 40% this month, poised to achieve its largest monthly gain in over 15 years, it still appears cheap compared to its peers. The stock has a price-to-earnings ratio of about 12 times based on expected earnings over the next 12 months, making it the cheapest component in the Philadelphia Semiconductor Index, while the overall index has a price-to-earnings ratio of 26 times, far below NVIDIA's 32 times.

Hendi Susanto, Portfolio Manager at Gabelli Funds, stated that based on Micron's role as a major player in AI data centers and enterprise storage, a 12 times expected price-to-earnings ratio is quite attractive. At the same time, investors should not overlook that Micron's capital expenditures are at a very high level—$14 billion this year, and even more next year." However, some Wall Street professionals believe that the price-to-earnings ratio is a misleading indicator for assessing Micron's value, as the company exhibits cyclical characteristics of boom and bust. Bloomberg Intelligence analyst Jake Silverman stated that the price-to-book ratio is a better measure, and according to this metric, Micron is "far above the previous cycle," indicating a degree of excessive optimism.

AI Demand Drives Growth but Cyclical Risks Remain

Citigroup analyst Christopher Danely wrote in a report to clients earlier this month that Micron benefits from demand that exceeds expectations, which surpasses production capacity. He expects Micron to significantly exceed consensus expectations in its guidance, as the data center business accounts for more than half of its revenue.

However, after a sharp rise in stock prices in recent weeks, investors are proceeding with caution. The growth of chip manufacturers is rarely linear, and even a brief downturn always carries the possibility.

Morgan concluded: While AI is significant, Micron remains a highly cyclical stock. Micron is in a favorable position, but it is not Nvidia and cannot enjoy huge profit margins.