Micron Technology shares have more than tripled this year, yet the chipmaker trades at just above six times forward earnings — the third-lowest multiple in the S&P 500. New long-term supply contracts with price floors are reshaping the memory market's boom-bust reputation, raising the question of whether Micron's valuation discount still fits.
Micron Technology shares trade at just above six times forward earnings, the third-lowest multiple in the S&P 500. Only Charter Communications and General Motors carry a cheaper multiple, even though Micron stock has more than tripled this year.
Memory has historically been one of the most cyclical corners of the semiconductor industry: profits surge when supply is tight, then fall sharply once new capacity catches up with demand. That history has kept investors reluctant to pay up for Micron's earnings.
Nvidia's results reignite the debate
The tension resurfaced after Nvidia reported earnings. Nvidia shares rose sharply the following day after strong results and guidance, and Nvidia Chief Financial Officer Colette Kress told analysts the company is "experiencing extreme pricing conditions in memory."
For Micron, one of the three major suppliers of high-bandwidth memory used in AI systems, that pricing backdrop should be a positive. Yet Micron opened about 3% higher before giving up the gain and finishing the session lower. D.A. Davidson's Gil Luria pointed to a broader trading unwind, as investors who had financed long semiconductor positions by shorting software stocks had to sell chip names once software rebounded.
Long-term contracts change the risk profile
The bear case still holds weight: more supply is coming, including new competition from China, and Micron may not capture the full upside of the current shortage because of long-term customer agreements that include price ceilings and floors. However, those same contracts also limit how far earnings can fall when the cycle turns.
These agreements include binding volume commitments, take-or-pay provisions and, in many cases, price floors, and Micron has said the deals generally extend through 2030. Once planned agreements are completed, roughly half or more of company revenue should be covered by such arrangements. For contracts with price bands, management has said the minimum prices would still imply gross margins well above the company's peak quarterly margins in previous memory cycles.
A narrower range of outcomes
Micron is not immune to cyclicality. A meaningful share of revenue remains exposed to market prices, contracts can eventually reset, and additional supply will still arrive. But the new agreements trade away some peak-cycle upside for greater earnings visibility, narrowing the range of outcomes on both sides.
At roughly six times forward earnings, the market is still pricing in significant skepticism about the durability of Micron's profits. The question now is whether Micron remains cyclical enough to deserve the same valuation framework investors used in previous memory cycles.
Source: CNBC
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