Market misjudging AI storage cycle? Micron Technology, Inc. (MU.US) high-level fluctuations highlight disagreements as bulls call for a target price of $1300.

After a brief pullback, Micron Technology, Inc. (MU.US) has resumed its upward trend, with a cumulative increase of up to 280% in the year. In the market environment driven by the AI boom, which has led to a mismatch in supply and demand for storage chips and a comprehensive revaluation of the sector's valuation, Micron still has sufficient upward momentum. Behind the high-level fluctuations in stock prices, market divergences continue to be evident. Some believe that the inflection point of the storage boom cycle is approaching, and that the stock price of Micron Technology, Inc. is soon to experience a correction. However, Seeking Alpha writer Nova Capital remains bullish on Micron Technology, Inc.: although the cycle will not always be on the rise, there are no signs of weakness in the short term. The current shortage of storage chip supply is still expanding, with chip prices continuing to rise, boosting Micron's and the industry's profitability. Micron is set to release its financial report for the third quarter of the 2026 fiscal year on June 24th, and Nova Capital expects the company's performance to significantly exceed expectations once again, providing a more optimistic outlook than the market expects. Performance expectations are likely to be further revised upwards, leading to a new round of price increases. Performance review: Strong growth in two major business segments, solid balance sheet In the second quarter of the 2026 fiscal year, Micron achieved revenue of $23.86 billion, a year-on-year surge of 196%, with a quarter-on-quarter growth of 75%. This revenue exceeded the upper limit of the company's guidance and was 21% higher than market expectations. During the upswing phase of the cycle, Micron's gross margin also improved significantly, reaching a record 75% for the quarter; adjusted earnings per share were $12.20, a 682% year-on-year increase, surpassing the market's general expectation by more than 33%. This was also the quarter with the largest performance surprise in the past three years. Both major business segments showed strong growth: Cloud Storage Business Unit (CMBU) and Core Data Center Business Unit (CDBU) saw quarter-on-quarter revenue growth of 47% and 139%, respectively. The company's cash flow performance was also solid. Unlike many tech companies with trillion-dollar market caps, Micron's capital expenditures are controllable. In the second quarter alone, Micron's operating cash flow (OCF) reached $11.9 billion, with free cash flow (FCF) at $6.9 billion, and the end of period cash reserves on the balance sheet were nearly $14.6 billion. Outlook for the future: Q3 performance outlook and multiple positive catalysts Investors who have gone through multiple storage cycles have overlooked two key variables: the strategic scarcity of storage chips, and the operating strategy of top manufacturers controlling production. Storage chip manufacturers are now taking a more judicious approach, trying to extend the cycle as much as possible by using long-term supply agreements and strategic customer locking contracts to ensure stable production and prices in the coming quarters. Even though Micron and its Korean counterparts are planning to expand production rapidly, the demand for AI computing is outpacing expectations. Nova Capital points out that even if manufacturers started expanding production last year, or even several years ago, the additional supply in the market from 2026 to 2027 will still be limited. Specifically, Micron's two massive wafer fabs in Idaho and New York will not achieve large-scale wafer shipments until the middle of 2027, and the new NAND flash memory factory in Singapore will not begin production until the second half of 2028. Hynix's M15X line and Samsung's P5 line will also not be able to relieve supply tightness until the end of 2027 to 2028, and capacity shortages are a common issue across the industry. Nova Capital emphasizes that the prerequisite for industry sentiment reversal is an oversupply, but looking at the current industry situation, there is almost no possibility of this in the next 12 to 18 months, meaning upstream manufacturers will continue to occupy a strong pricing position for the long term. NVIDIA Corporation's Vera Rubin architecture is entering mass production, and Micron has already begun supplying HBM4 memory for NVIDIA Corporation's new products, a significant positive that has not yet been fully reflected in Micron's financial reports. Additionally, Micron is developing customized HBM4E products and plans to start mass production using 1-gamma technology in 2027, deeply integrating customer chip intellectual property. In the long term, this product can expand the company's moat, enhance customer stickiness, and drive the transition of storage products from commodities to strategic core components. According to Nova Capital, the market has not fully priced in the growth value of the HBM business. There is a significant discrepancy in market expectations for Micron's third-quarter revenue, with estimates ranging from $20.39 billion to $203.9 billion. At the same time, the market expects Micron's third-quarter earnings per share to range from $7.53 to $24.08, showing significant differences. Micron management expects third-quarter revenue to be $33.5 billion (with a fluctuation of $750 million), while the market generally expects $34.34 billion, slightly above the upper limit of guidance. Expectations higher than the upper limit of guidance could be seen as a bearish signal, but since the company issued its guidance, chip prices have continued to rise: traditional DRAM contract prices surged by 90%-95% in the first quarter of the 2026 fiscal year and rose again by 58%-63% in the second quarter. As of June, storage prices have approached historical highs. Based on this, Micron's actual third-quarter revenue is likely to easily exceed the upper limit of guidance. The market will focus on the performance of gross margins this quarter. Nova Capital expects Micron's gross margin to reach the management's target of 81%, and more importantly, customer order delivery rates will remain low. In the second quarter, the CEO mentioned that Micron could only meet 50%-66% of the purchasing needs of core customers, and Nova Capital expects delivery rates to remain at this level for the third quarter and several subsequent quarters. This means that the current high gross margins are sustainable, and there is still room for upward revisions to market profit expectations for the full year. If these assessments materialize, profit forecasts for the 2027 fiscal year and beyond could see a new round of upward revisions. Micron's valuation remains attractive, with bulls seeing it rise to $1,300 Nova Capital believes that the stock price of Micron is far from its peak, and caution should only be exercised when the forward P/E ratio reaches 15 to 20 times, signaling a valuation bubble. Based on the profitability forecast for the 2027 fiscal year, to reach this valuation range, the stock price would need to double from its current level. According to data from Seeking Alpha, Micron Technology, Inc. currently has a forward P/E ratio of over 16 times based on non-GAAP earnings per share expectations, which may initially seem high. However, with core product prices showing no signs of decline, combined with multiple catalysts such as the collaboration with NVIDIA Corporation and ongoing upward revisions in profit forecasts, the current level of the forward P/E ratio does not pose a significant risk. It is worth noting that the forward P/E ratio based on profit expectations for the 2027 fiscal year is still below 10 times. Nova Capital concludes that the market's inertia in applying traditional boom-bust cycle logic to the storage industry is the core reason why Micron's stock price has long been discounted. However, the company's growth momentum remains strong, and Micron continues to sign a large number of multi-year strategic supply agreements, significantly reducing the impact of industry downturns on performance. Based on the current industry situation, the bottleneck of scarce storage chip supply is difficult to alleviate in the short term, and the gap is likely to persist for at least the next two years. From this perspective, the current stock price clearly reflects a pricing mismatch. As Micron's performance in the 2027 fiscal year gradually materializes, the company's valuation is likely to see a restoration. Nova Capital maintains a "buy" rating on Micron with a target price of $1,300.5, representing a 20% increase from the current price. TipRanks data shows that most Wall Street analysts are bullish on Micron Technology, Inc., but the average target price is $1,017.86, which is 6% lower than the current level.