According to a latest research note from Citi, the bank invited Micron Technology (MU.US) Chief Financial Officer Mark Murphy and Director of Investor Relations Jeff Grattan to attend an investor conference in Los Angeles.

Overall, the bank believes that as hyperscaler demand driven by artificial intelligence (AI) continues to accelerate, the market is underestimating the extent to which DRAM/HBM supply could remain persistently tight.

At the same time, as the benefits from process node shrinking continue to diminish, memory manufacturers must rely on long-cycle greenfield capacity expansions. As a result, supply of HBM and advanced memory may remain tight through 2027 and 2028. The following are the main takeaways summarized by Citi.

AI Demand

Customers are still continuously underestimating AI demand. AI payback has become very clear, and overall credit conditions/capacity conditions remain strong. The incentives for using higher-capacity and higher-performance memory give it a favorable differentiation advantage in terms of cost per token.

In Citi's view, supply is the key factor that the market is underestimating: density gains from process node transitions are diminishing (1-delta is about 25%, compared with 30%-40% for 1-gamma and earlier nodes). The HBM conversion ratio consumes wafer capacity, while DRAM bit growth is only in the low-20% range. Truly alleviating supply pressure requires building entirely new fabs, which takes a long time, and cleanroom space is a limiting factor.

Micron Technology's construction-related spending as a share of capital expenditure is approaching 50%.

Visibility

Micron Technology expects the DRAM supply-demand environment in 2027 and 2028 to be even tighter than in 2026. Strategic Customer Agreements (SCAs) account for 35% of sales through 2030, and the company aims to increase this proportion to about 50%. About 75% of the non-SCA business has already been contracted through 2027.

HBM

Next year, HBM margins will narrow relative to DRAM, and HBM growth is expected to outpace the overall DRAM market. Despeccing is a phenomenon of supply scarcity, as it allocates available DRAM to more accelerators.

Cash and Capital

Micron Technology has generated exceptionally strong cash flow, producing about $33 billion in free cash flow in the quarter ending in August, while free cash flow in the quarter ending in November will increase further. Management stated that AI-driven demand and higher-value products (HBM, data center DRAM, SSD) are supporting significantly stronger cash generation than in previous memory cycles.

Although Micron Technology expects a substantial increase in capital expenditure for fiscal 2027 (Citi estimates more than $50 billion) to support technology node transitions and manufacturing expansion, the company still expects to generate substantial free cash flow given the favorable industry backdrop. Micron Technology recently approved a record $35.2 billion share buyback plan.

As the restrictions under the CHIPS Act expire in December 2026, the company will significantly increase shareholder returns starting in December 2026. This buyback authorization underscores management's confidence that the company will continue to generate strong free cash flow in a structurally tighter DRAM supply-demand environment from 2027 to 2028.

Valuation

Citi assigns Micron Technology a "Buy" rating with a target price of $1,300, equivalent to about 8 times expected earnings per share (EPS) for 2027. This target price implies about 32% upside from the stock's Wednesday closing price of $983.23. Given the current unprecedented pricing environment and the emergence of Strategic Customer Agreements (SCAs), this valuation represents a slight premium to Micron Technology's trading range in previous DRAM upcycles.