Micron's current trailing P/E is about 20x, but the market's forward P/E based on expected earnings for next year is only 6x. Earnings growth is extremely rapid, with next year's expected profit scale far exceeding the past twelve months. The market is only willing to give a 6x valuation because investors assume the current industry boom will end soon.
The memory industry has always been this way: high product prices stimulate new supply, and the release of that supply ends the industry's prosperity.
However, last Friday, the new supply that could potentially end the current cycle finally announced its investment amount and production timeline. SK Hynix committed approximately $38 billion to build two new wafer fabs, with the first cleanroom not scheduled to start operations until December 2028.
Micron employees attend groundbreaking ceremony
Micron employees attend groundbreaking ceremony
Industry Boom is Still Accelerating
The market's discounted high earnings are not a castle in the air. In the third fiscal quarter of fiscal 2026 (ending May 28), Micron's revenue more than tripled year-over-year to $41.5 billion; just the previous fiscal quarter, revenue was only $23.9 billion. Gross margin climbed to 84.6%, compared to 74.4% in the second quarter and 37.7% in the same period last year. Operating cash flow increased more than fourfold year-over-year to $25.4 billion.
Management expects performance to continue rising. Guidance indicates Q4 fiscal revenue of approximately $50 billion, a gross margin of about 86%, and earnings per share of roughly $30.73.
Based solely on this guidance for an annualized estimate, the corresponding P/E ratio for the stock price is only 7x.
All growth is driven by data center demand. Micron's Q3 data center business revenue exceeded $25 billion (annualized scale over $100 billion).
In the written remarks from the June earnings call, the company stated that demand for DRAM and NAND in the industry is "consistently and significantly outstripping supply."
Timeline for New Supply is Now Clear
For memory chip stocks, the core variable is when new capacity will be deployed. Last Friday, SK Hynix's board approved a total of 54 trillion won (approximately $38 billion) for two new wafer fabs. Of this, 35.2 trillion won will be allocated to the Y2 DRAM fab in Yongin, South Korea; the remaining 19.1 trillion won is for the M17 NAND fab in Cheongju.
Compared to the investment amount, the production timeline is more critical. Construction for the M17 fab begins in February 2027, with the first cleanroom starting operations in December 2028; construction for the Y2 fab starts in July 2027, with the first cleanroom starting operations in June 2029.
Note: The start of cleanroom operations generally only means equipment entry into the facility, not mass production. In other words, this batch of capacity confirmed now won't be truly released until after 2028.
This aligns with Micron's own statements. In the same June remarks, Micron noted that driven by AI demand across all segments, coupled with structural constraints on the supply side, the industry's tight supply-demand balance "will persist beyond 2027."
Of course, some new capacity will come online sooner. SK Hynix's Yongin Fab 1 is already under construction, with the first cleanroom planned to start operations in February 2027. Micron itself is also expanding aggressively, with Q3 capital expenditure alone reaching $7.1 billion.
Even including all these projects, Micron still judges that the supply-demand tightness will last through 2027; the batch of large wafer fabs approved last week all have production timelines after 2027.
Long-Term Contracts Lock in Downside Risk
In this current boom cycle, Micron is also positioning ahead of time to address the cyclical turning point. The company has signed 16 strategic customer agreements, all take-or-pay contracts: customers commit to purchasing fixed quantities of products for multiple years. Most contracts are for 5-year terms, covering the full period from 2026 to 2030.
These contracts collectively cover about 20% of Micron's DRAM shipments and one-third of its NAND shipments during that period. Management expects that over half of the company's future revenue will be covered by such long-term agreements.
Large contracts among them include price caps, anchored to market prices in the second quarter of 2026; they also set price floors effective during the contract period. Once the industry declines, the price floor will support the revenue from Micron's contract income against downside risk.
CEO Sanjay Mehrotra stated in the June earnings report that these agreements "will significantly enhance the sustainability and predictability of Micron's outstanding financial performance."
The cycle will eventually turn. The memory industry has always been this way; today's record-high product prices are financing new capacity that will eventually suppress the boom. But the current stock price trades at only about 6x forward earnings, as if the industry turning point is imminent.
Yet the industry's publicly available construction timeline shows that massive new capacity is concentrated in 2028-2029, and Micron's long-term contracts extend through 2030. In my view, the duration of the company's high-profitability state is likely to be longer than what the market pricing reflects.
The biggest risk is not the pace of fab construction: Even if no new fabs come online, if AI demand cools, memory prices will still fall. But looking at the industry's confirmed expansion plans, the arrival of the cyclical turning point may be more distant than the stock price suggests.
Comments