Micron's AI Boom Boosts Margins, But Overvaluation Masks Cyclical Risks

What happened

Micron Technology has leveraged the AI boom to achieve record financial performance, with recent coverage highlighting soaring revenue and margins. The DeepValue master report confirms this surge, noting Q1 FY26 revenue of $13.6 billion and gross margin near 68%, driven by sold-out high-bandwidth memory (HBM) contracts. However, the stock's 274% rally over the past year has pushed its valuation to about 36x trailing EPS and 23x EV/EBITDA, embedding optimistic assumptions of sustained peak profitability. Critical analysis reveals that this overlooks structural risks, including upcoming capacity expansions from 2027 and potential moderation in hyperscaler AI capex, which could normalize margins. Thus, while operational momentum is strong, the investment case is clouded by overvaluation and cyclical vulnerabilities.

Implication

Short-term, Micron's contracted HBM supply for 2026 ensures revenue stability, but investors must watch for margin compression as new fabs ramp and AI demand potentially slows. The stock's high valuation and crowded bullish narrative make it sensitive to any negative shifts, such as reduced hyperscaler capex guidance or pricing pressure. Existing holders are advised to rebalance by reducing exposure to lock in gains and mitigate downside from a possible 30-40% retracement if margins normalize. New investors should delay purchases until clearer signs of sustainable profitability or a lower entry point emerge, focusing on gross margin trends and 2027 HBM bookings. Overall, the risk-reward skew is unfavorable, with more downside than upside from current levels, emphasizing capital preservation over chasing further gains.

Thesis delta

The new article corroborates Micron's strong AI-driven performance but does not alter the core thesis of overvaluation and cyclical risk from the DeepValue report. No shift in investment stance is warranted; the recommendation remains a potential sell, with trimming advised into strength and patience for a better entry point. This reinforces the need for critical scrutiny beyond surface-level optimism to assess long-term sustainability.