Why Micron Stock Looks Cheap After a Record Year
Investors are pricing in a downturn that the latest numbers don't yet show.
Micron Technology (MU) has reported a record year, with fiscal 2026 revenue reaching $133 billion and adjusted earnings at $75.52 per share, a dramatic increase from $8.29 the previous year. Despite this success, the stock price fell about 13% on the day earnings were announced. Investors are concerned that the market may be undervaluing Micron, given its forward price-to-earnings (P/E) ratio of around 5.5, which suggests a potential market downturn. The S&P 500's forward P/E stands at approximately 19, indicating a higher valuation expectation.
Micron's concerns are twofold: the demand for its products and the supply available to meet that demand. The company has secured long-term strategic customer agreements (SCAs), including 26 deals with buyers obligated to purchase specific volumes or pay penalties, backed by $32 billion in financial commitments. While this won't cover all future revenue, it provides some stability.
Furthermore, analyst forecasts predict server spending will grow by 28% annually to $1.58 trillion by 2030, indicating strong demand for Micron's memory chips.
Adjusted free cash flow reached $33 billion in the most recent quarter and $62 billion for the full year, supporting significant capacity expansion investments. Micron spent around $27 billion on capital expenditures in fiscal 2026 and plans to spend about $25 billion in the first half of fiscal 2027. However, there is a risk that new factories could increase supply, leading to lower memory prices and potentially ending the boom.
Micron's SCAs cover 35% of expected revenue through 2030, leaving the remaining 65% exposed to market fluctuations.
Investors can monitor two key metrics to gauge the balance: selling prices for dynamic random access memory (DRAM) and days of inventory, which management reports each quarter. DRAM prices have risen in the high teens due to high demand and limited supply. Days of inventory, which measure how long chips sit before selling, have increased by nine days to 129 but are expected to decline as supply remains tight.
If days of inventory continue to rise while prices remain stagnant, it may signal an oversupply. At a valuation of 5.5 times expected earnings, Micron's stock already assumes an impending industry downturn. As long as prices continue to rise and inventory days decrease, as management anticipates, the stock could be considered genuinely undervalued and poised for further growth in the coming year. Conversely, if either metric moves in the wrong direction, the skeptics might be proven correct.
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