Micron Technology shares MU are recovering after Thursday’s sharp technology selloff, but questions remain over whether the memory-chip maker’s low valuation reflects an investment opportunity or the risk of a downturn in AI-related demand.
The stock gained 5.8% on Friday after plunging 17% in the previous session.
At Thursday’s closing price, Micron traded at just 3.7 times its estimated fiscal 2027 earnings, according to FactSet.
That valuation appears particularly low given expectations that the company will more than double its revenue and earnings in the current fiscal year, with further growth forecast for the following year.
However, memory-chip companies often trade at low earnings multiples near the peak of their cycles, when profits are elevated.
Micron’s low valuation faces memory-cycle risks
The main concern is whether demand for memory chips used in artificial intelligence servers could weaken sooner than expected.
The potential slowdown in data-centre construction following Democratic victories in the US midterm elections has raised questions about the sustainability of AI infrastructure spending.
A downturn in memory demand, previously expected in 2028 or later, could arrive earlier if data-centre investment slows.
Micron has some protection against this risk through long-term take-or-pay agreements covering more than 35% of its forecast revenue through 2030.
The contracts require customers to pay for agreed supplies, potentially reducing the impact of normal fluctuations in memory-chip supply and demand.
However, there are concerns that customers could seek to renegotiate these agreements during a downturn in AI spending.
Similar contracts across the semiconductor industry during the supply shortages caused by the Covid pandemic were later renegotiated to maintain customer relationships.
Micron has received close to $32 billion in cash deposits under its agreements, but the durability of the contracts remains an important consideration for investors.
Buybacks could support Micron shares
The company also has the option of using share repurchases to support its stock. Micron can begin major buybacks from December 9.
Barron’s estimates the company could repurchase $100 billion of its shares during its current fiscal year, which ends in August 2027. That amount would represent more than 10% of its current market value.
The potential scale of the buyback programme could provide another factor for investors assessing the stock’s valuation, although its execution will depend on the company’s capital allocation decisions.
Analysts divided on AI infrastructure outlook
Analyst views on semiconductor valuations and AI spending remain mixed.
UBS analyst Nicolas Gaudois argues that valuations for Micron’s South Korean peers, SK Hynix and Samsung Electronics, indicate that markets are already pricing in a downturn in memory prices in 2028.
He estimates a risk-reward profile for the two companies that implies 160% potential upside over the next 12 months against 30% downside.
Micron trades at only a slightly higher valuation than the South Korean companies, suggesting a broadly similar scenario.
Raymond James Chief Investment Officer Larry Adam also remains positive on AI infrastructure.
He believes some semiconductor and AI stocks are trading at discounts of around 30% to historical valuations and expects earnings growth to remain healthy.
He therefore favours gradually rebuilding exposure to technology and semiconductor stocks.
However, Dan Ives of Yorkville Ives has become more cautious.
He now expects 10% fewer data centres in his baseline forecast, with potential reductions reaching 15% to 20%.
He also expects Big Tech capital spending growth to peak in 2027, earlier than previously anticipated.
Ives believes AI infrastructure projects are more likely to face delays than outright cancellations.
His preference has consequently shifted towards software stocks over semiconductor companies.
AI disclosure: AI tools assisted with research and drafting of this piece. An Invezz editor reviewed the facts, sources and wording before publication. Any opinions or analysis are Invezz’s, not those of an automated system.
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