After a brief pullback, Micron Technology (MU.US) has resumed its upward trajectory, with year-to-date gains reaching a remarkable 280%. Driven by the AI boom creating a supply-demand imbalance for memory chips and a sector-wide valuation reassessment, Micron still possesses significant upward momentum. The stock's high-level volatility underscores persistent market divergence. Some analysts believe a turning point in the memory cycle is approaching, suggesting Micron's share price could soon face a correction.

However, Seeking Alpha contributor Nova Capital remains firmly bullish on Micron Technology. While acknowledging cycles don't rise forever, they see no near-term signs of weakness. The supply gap for memory chips continues to widen, and chip prices keep climbing, consistently boosting profitability for Micron and its peers. With Micron set to report its fiscal 2026 third-quarter earnings on June 24th, Nova Capital anticipates another significant earnings beat and guidance that is more optimistic than market expectations. This could lead to further upward revisions in earnings forecasts, potentially fueling a new wave of stock price appreciation.

Performance Review: Strong Growth Across Segments, Robust Balance Sheet

For the fiscal 2026 second quarter, Micron reported revenue of $23.86 billion, a staggering 196% year-over-year increase and 75% sequential growth. This revenue surpassed the high end of the company's guidance and beat market expectations by 21%. During this cyclical upswing, Micron's gross margin improved substantially, with the adjusted gross margin for the quarter reaching a record 75%. Adjusted earnings per share came in at $12.20, a massive 682% increase year-over-year, exceeding the consensus estimate by over 33%. This marked the quarter with the largest earnings beat in nearly three years.

Both major business segments showed robust growth: the Cloud Memory Business Unit (CMBU) and Core Data Center Business Unit (CDBU) saw revenue increase sequentially by 47% and 139%, respectively. The company's cash flow performance was also solid. Unlike many trillion-dollar tech giants, Micron's capital expenditure is relatively controlled. In the second quarter alone, operating cash flow (OCF) reached $11.9 billion, free cash flow (FCF) was $6.9 billion, and the balance sheet held nearly $14.6 billion in cash reserves at quarter-end.

Looking Ahead: Q3 Preview and Multiple Catalysts

Investors familiar with past memory cycles may be overlooking two key variables: the strategic scarcity of memory chips and the proactive supply management strategies employed by leading manufacturers. Memory chip makers are now adopting smarter approaches, such as long-term supply agreements and strategic customer lock-in deals, to extend the cycle and ensure stable production volumes and pricing for several quarters ahead.

Even if Micron and its South Korean peers were to rapidly expand capacity, the explosive growth in AI computing demand has far outpaced industry projections. Nova Capital points out that even if capacity expansion had begun last year or several years ago, new supply entering the market in 2026-2027 would remain very limited. Specifically, Micron's two mega-fabs in Idaho and New York are not expected to achieve large-scale wafer output until mid-2027 and 2028-2030, respectively. A new NAND flash plant in Singapore is also slated for production only in the second half of 2028. Similarly, SK Hynix's M15X line and Samsung's P5 line are not expected to alleviate supply constraints until late 2027 or 2028, making capacity shortage an industry-wide issue.

Nova Capital emphasizes that an industry downturn requires oversupply, a scenario that appears highly unlikely over the next 12 to 18 months given the current landscape. This suggests upstream manufacturers will maintain strong pricing power for an extended period.

The Nvidia Vera Rubin architecture is entering mass production, and Micron is already supplying HBM4 memory in volume for Nvidia's new products, a significant positive catalyst not fully reflected in Micron's financials yet. Furthermore, Micron is developing a customized HBM4E product, planned for mass production using the 1-gamma process in 2027, which involves deep integration with customer chip IP. Long-term, this product can widen the company's moat, increase customer stickiness, and drive the transformation of memory products from commodities to strategic core components. In Nova Capital's view, the market has not yet fully priced in the growth value of the HBM business.

Current institutional expectations for Micron's Q3 revenue show extreme divergence, with the highest and lowest estimates differing by $20.39 billion. Similarly, market EPS estimates for the quarter range from $7.53 to $24.08, indicating significant disagreement. Micron's management has provided Q3 revenue guidance of $33.5 billion (plus or minus $750 million), while the market consensus stands at $34.34 billion, slightly above the guidance high-end.

While consensus above guidance might be seen as a negative signal, chip prices have continued to rise since the guidance was issued: traditional DRAM contract prices surged 90%-95% in fiscal Q1 2026 and rose another 58%-63% in Q2. As of June, memory prices are nearing historical peaks. Based on this, Micron's actual Q3 revenue is highly likely to easily surpass the high end of its guidance.

The market will focus closely on gross margin performance this quarter. Nova Capital expects Micron's gross margin to reach the 81% projected by management. More critically, customer order fulfillment rates are expected to remain low. In Q2, the CEO noted Micron could only meet 50%-66% of core customer demand, and Nova Capital expects this fulfillment rate to persist into Q3 and subsequent quarters. This suggests the current high gross margins are sustainable, leaving room for upward revisions to full-year profit estimates. If these assessments hold, profit forecasts for fiscal 2027 and beyond could see another round of upward adjustments.

Attractive Valuation with Bullish Target of $1300

Nova Capital believes Micron's share price is far from its peak, arguing that valuation bubble concerns would only arise if the forward P/E ratio reached 15-20x. Based on fiscal 2027 earnings projections, reaching that valuation range would require the stock to roughly double from current levels. Seeking Alpha data shows Micron's current P/E based on non-GAAP EPS expectations is over 16x, which may seem elevated at first glance. However, with core product prices not declining, coupled with multiple catalysts like the Nvidia partnership and ongoing upward earnings revisions, the current forward P/E does not pose a significant risk.

Notably, the P/E based on fiscal 2027 earnings expectations remains below 10x. Nova Capital concludes that the market's habitual application of the traditional boom-bust cycle logic of the memory industry is the core reason for Micron's persistent valuation discount. However, the company's current operational growth momentum remains strong, and Micron is continuously securing numerous multi-year strategic supply agreements, significantly mitigating the impact of potential industry downturns.

Judging from the industry's current state, the bottleneck of memory chip supply shortages is unlikely to ease in the short term, with the gap expected to persist for at least the next two years. From this perspective, the current stock price appears mispriced. As fiscal 2027 performance materializes, Micron's valuation is likely to see a recovery. Nova Capital maintains a "Buy" rating on Micron with a price target of $1300.50, representing over 20% upside from current levels. TipRanks data shows most Wall Street analysts are bullish on Micron Technology, but their average price target is $1017.86, about 6% below the current trading level.