We are all familiar with the saying that looks can be deceiving, although we tend to forget this very true notion.
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The same can be said about Micron (MU), a semiconductor company specializing in the design of memory chips. At first glance, the stock looks overvalued. When looking at the company’s earnings on a trailing 12-month basis, the stock doesn’t look remotely cheap at $0.67 per share, which puts it at a price-to-earnings multiple of 161x. However, these data points don’t consider future guidance and forward consensus estimates, which paint a different framing around the stock’s true valuation.
If you wish to read more extensively about Micron’s prospects, our writer at Tipranks’ Michael Byrne, has written in-depth on MU stock, and you can read it right here.
Now, let’s examine three major talking points regarding MU’s valuation from a wider perspective.
- Forward-Looking Valuation: Micron’s trailing price-to-earnings at its current state seem over-blown and over-stretched. However, the market tends to look for the horizon, and investors will see a bright outlook when looking forward. Micron’s guidance for the next quarter sees a jump to $1.74 earnings per share, more than double its current earnings. Yet, for Fiscal 2025, analysts predict an impressive $8.93 per share, which lowers the P/E ratio to a multiple of 11.8, which is much easier on the eyes and pockets. Also, for 2026, earnings estimates are at a multiple of 8.2, highlighting nice upside potential.
- Comparison to Industry Peers: If we consider MU’s expected valuation for the next quarter or the entirety of Fiscal 2025, it will trade at a much lower price than its industry peers. For comparison, we just have to look at Nvidia (NVDA) and AMD (AMD), which trade at 46.3x. It’s true those companies boast significantly higher gross margins than Micron, and greater prestige for their design of AI processors than MU’s design of so-called simple chip memory, which seems less glamorous. To illustrate, Nvidia has generated a 76% gross margin compared to Micron’s 22.4%. Nevertheless, one must look at the future and see where the industry is going, and it looks like the right path for Micron and its investors. Memory chips have a huge role in GPU processors, which will grow as AI becomes more influential. Additionally, advanced capabilities will need greater RAM memory, which is Micron’s specialty.
- Technological Advancements: Micron’s is not just any memory chip designer; its high bandwidth memory chips are exactly what today’s GPUs need to calculate an incredible amount of data as AI continues to evolve. RAM is one of the most crucial aspects of faster processors, and the more AI advances, the more RAM it will need. Enter Micron’s high bandwidth memory chips to cater to those cutting-edge GPUs Nvidia is famous for. This makes for beautiful growth prospects for the California-based company and puts it in a prime position to enjoy increased earnings in the coming years.
What Is MU’s Price Target?
Micron is a Strong Buy on Wall Street, with 22 Buys, 1 Hold, and 1 Sell. The average price target for MU stock is $148.68, reflecting 33.77% upside.
Conclusion
On the face of it, Micron’s valuation looks steep, but when we examine the company’s prospects more closely, we get a different story and probably a good entry point for investors. MU looks to be in a great position to benefit from the AI revolution, which will need all the RAM it can get.
