Micron's AI-Driven Surge Faces Valuation Reality Check as Shortages Mask Cyclical Risks

What happened

A recent article highlights the booming demand for memory chips from AI data centers, forecasting shortages through 2028 and positioning Micron as a prime beneficiary. Micron's financial performance supports this optimism, with Q1 FY26 revenue soaring to $13.6 billion and gross margin reaching ~68%, fueled by sold-out HBM contracts for 2026. However, the stock has skyrocketed 274% in a year, trading at ~36x trailing earnings and ~23x EV/EBITDA, pricing in expectations of sustained peak margins and uninterrupted AI growth. The DeepValue report cautions that memory remains structurally volatile, with new industry capacity set to hit from 2027 and risks like hyperscaler capex cuts potentially dragging margins back toward 45-50%. This juxtaposition reveals strong near-term fundamentals but a valuation that offers limited upside versus significant downside if the cycle normalizes.

Implication

The AI-driven memory shortage bolsters Micron's near-term earnings, but the stock's premium multiples leave little margin for error if growth slows. If hyperscalers reduce AI capex by 20% or more, as flagged in the report, HBM pricing and margins could compress sharply toward historical levels. New capacity from Micron's fabs and competitors arriving from 2027 risks flipping the market from shortage to oversupply, undermining current profitability assumptions. Existing holders are advised to trim above $425, while prospective buyers should wait for a pullback closer to the attractive entry of $275. Key monitors include Q2 gross margins staying above 60% and 2027 HBM booking progress to gauge if the AI boom can outlast the coming capacity wave.

Thesis delta

The new article confirms near-term AI demand strength but does not alter the core thesis that Micron's stock is overvalued relative to cyclical risks. Investors should maintain a cautious 'POTENTIAL SELL' stance, as the thesis only shifts if evidence emerges of sustained margin durability beyond 2026 or accelerated AI capex outperformance.