MU Earnings Add AI Memory Muscle, Valuation Shows Investor Caution

George Tsilis (0:04)

Welcome back to the Tech Corner. I'm George Tsilis, Senior Marketers contributor here with the Schwab Network. On this week's edition, we're going to be revisiting Micron Technologies. Now Micron is one of the world's largest manufacturers of semiconductor memory and storage products. The company produces three major types of memory, DRAM, NAND flash memory, and high bandwidth memory, also known as HBM. DRAM provides a working memory used inside computers, servers, and AI systems. NAND helps longer-term data storage, and HBM, which is extremely fast, is vertically stacked memory that sits next to advanced AI processors, such as NVIDIA's GPUs. The company operates across four major businesses including cloud memory, core data center, mobile client, as well as automotive and embedded systems. Now, the biggest story surrounding Micron is its transitioning from a traditional cyclical memory manufacturer into a critical supplier of AI infrastructure.

Modern AI servers require dramatically more memory than traditional computing systems, which includes HBM for AI accelerators, large amounts of conventional DRAM for servers, and increasingly high-performance SSD storage for AI inference. Now, in the competitive landscape, two major competitors are SK Hynix and Samsung. These companies compete directly with Micron and DRAM, as well as high bandwidth memory.

In nFlash storage, Micron also competes with SanDisk. Now, a dark horse competitor is Chinese memory manufacturer CXMT, which is also becoming interestingly important, particularly in conventional DRAM technologies. Now, one advantage Micron has is exposure to several different parts of the AI memory ecosystem. It sells HBM, conventional DRAM, as well as NAM-based storage. So Micron is not dependent upon just one type of AI memory demand. Now, when it comes to unique value, Micron's biggest competitive advantage is increasingly its position at the intersection of AI computing and memory bandwidth. An AI accelerator can be extremely powerful, but that processor cannot perform efficiently unless enormous amounts of data can be delivered to it fast enough. That's why high bandwidth memory has become so important. It sits close to the AI processor and allows data to move at extremely high speeds. Micron's unique value also lies in the fact that now high volume production for HBM4 for NVIDIA's Vera Rubin platform is accelerating. Let's take a look at some recent news for Micron. Now, going back to this week on September 30th, the company reported another record quarter for fiscal Q4 2026

Revenue reached approximately $54.2 billion.

This was up 31 percent sequentially quarter over quarter, and remarkably up 380 percent year over year for the same quarter. Adjusted earnings reached $33.42, and gross margins expanded to an extraordinary 87 percent of sales.

Those numbers illustrate just how powerful the current memory environment has become.

The company is benefiting from a combination of explosive AI demand, tight industry supply, and dramatically higher memory pricing. For the entire fiscal year 2026, the company generated more than $133 billion in sales, compared to only $37 billion in the previous year.

So, that annual revenue more than tripled. And on a full year basis, non-GAAP EPS reached more than $75 a share. Now, the biggest growth driver remains data centers. The core data center business generated approximately $18 billion for the quarter. And one year earlier, that business generated only about $1.6 billion. So, revenue alone in the data center segment increased more than 11 fold. This gives you a sense just how rapidly AI infrastructure spending is flowing through Micron's business. The cloud memory segment also generated more than $16 billion in revenue. And both these businesses produced extremely high gross margins. From an outlook perspective, management also provided very strong numbers. For the current fiscal quarter, Micron expects revenue around $61.5 billion, which would represent another meaningful sequential increase from the record fourth quarter they just reported.

Earnings are expected to be around $38 a share, and gross margins are still expected to be rather high at over 86 percent of sales. One of the most important changes to Micron's story is the company's use of long-term customer agreements. Historically, memory has been one of the most deeply cyclical businesses in technology. As demand rises, prices increase, manufacturers expand production, supply eventually catches up, and then prices fall as well as earnings. Since earnings can collapse quickly, that's why you see typically speaking volatile price action over time. Now, Micron is trying to reduce that volatility as the company now has more than two dozen strategic customer agreements, covering long-term future and memory purchases. This does not necessarily eliminate the cyclicality of its business, but it could make Micron's future revenue and profitability much more predictable than were in previous cycles. Now, we got to keep in mind there are many other positives about the industry space right now. AI memory demand is extremely strong. High bandwidth memory has become an essential component of modern AI accelerators and Micron is already shipping HBM-4 for NVIDIA's Vera Rubin architecture, which keeps the company position near the center of the AI infrastructure build out. Another major positive is pricing power. As I mentioned, Micron's gross margin climbed to approximately 87 percent of sales, compared to less than 50 percent one year earlier. That tells us demand is running substantially ahead of available supply. Now, valuation is one of the most interesting parts of Micron's story. Despite the enormous increase in the stock price, Micron still trades at only about six times forward earnings. This is far below the semiconductor sector, as well as its own historical average. Now, on the surface, that looks extremely inexpensive, but just like SanDisk, the low multiple needs context. Micron is currently generating extraordinary earnings because of memory pricing. The AI demand and operating leverage are all working right now in its favor. Now, let's address some of the concerns as always. The biggest concern for Micron is one that has existed throughout the history of the memory industry, and that's cyclicality. Extremely strong pricing eventually encourages other manufacturers to increase production. Micron is investing aggressively in new manufacturing capacity, and Samsung and SK Hynix, the two Korean manufacturers that directly compete with Micron, are also expanding their capacity.