Obviously, as far as the 43% increase in 2024 is concerned, the market seems to be underestimating the bullish support surrounding US storage giant Micron Technology (MU.US), mainly because Micron won the HBM3E, a next-generation HBM storage system from AI chip leader Nvidia (NVDA.US). Perhaps this is why Micron was able to release an outstanding report of results for the second quarter of fiscal year 2024 ending in February, while providing guidance for the third quarter of fiscal year 2024 that far exceeded analysts' expectations, and strengthening its long-term capital expenditure plans.

Despite this, according to some relatively cautious “margin of safety” analysts, the stock has already overdrawn most of its future upward potential ahead of schedule, and has not provided a convincing dividend investment argument. The valuation is also far higher than that of its Korean storage peers.

The core investment purpose of the “margin of safety” is generally to “never chase higher” and “not pursue high-frequency trading”, focusing on choosing accurate action when the discount between the stock price and its lowest intrinsic value is low — that is, when the valuation of a stock is low, and strives to protect investors from market fluctuations and valuation errors.

The margin of safety is, by definition, the difference between the intrinsic value of an asset and its market price. Investors calculate this difference and use this as the basis for deciding whether to invest. Specifically, if the market price of the stock is far lower than the intrinsic value calculated through the valuation model, then the asset has a high margin of safety, and is therefore regarded as an attractive investment choice. In theory, a high margin of safety can provide protection when the market falls and bring higher returns when the market recovers.

According to analysts in the “margin of safety” group, Micron's stock price currently has no margin of safety, and based on the fact that most of the premiums have completely absorbed Micron's strong performance growth rate until 2026, these analysts do not recommend chasing Micron stocks at a high level based on this level of expansion.

Why does the always fair “Mr Market” continue to return the stock with high premiums and high valuations? The main reason is that the PC replacement cycle and strong demand for generative artificial intelligence hardware gave speculators a good opportunity to give Micron a high premium.

Although some “marginal safety” believers seem to have missed huge upward opportunities so far, they still believe that at Micron's current price level, there doesn't seem to be any more upside potential. Most of the optimism has already been priced by the market, and Micron's strong performance growth rate that will continue until 2026 has been absorbed by the market.

The driving force behind the strong trend in Micron's stock price: storage investment theory continues to gain strength

Micron recently released financial data for the second quarter of the 2024 fiscal year, which exceeded expectations across the board, showing that the company's revenue reached US$5.82 billion (up 23% month-on-month, 57.7% year-on-year), and adjusted earnings per share were $0.42 (up 114.2% month-on-month or 121.9% year-on-year). In terms of stock prices, Micron's stock price increased by 70% in 2023, and has increased by 43% since 2024.

As industry analysts generally believe that the global storage market has bottomed out in the first quarter of 2023 and has shown a downward recovery trend for the past four consecutive quarters, it is clear that the storage giant management's concerted production capacity reduction measures have achieved the expected results. Samsung Electronics has reported a similar rebound in performance so far, and the newly released preliminary results for the first quarter far exceeded market expectations

NAND storage giant Western Digital (WDC.US) also reported the same data. Since demand far exceeded expectations, both HDD and SSD storage experienced supply shortages, and suppliers chose to raise prices by up to 20%.

Storage is a critical part of the generative AI trend, which requires large-scale storage solutions that can handle large amounts of data, provide high throughput, provide low latency access, and store data securely. As a result, these facts have continued to drive the stock price trend of storage giants to soar since the end of 2023. In particular, high-performance DDR5 storage, which favors the high-end sector, and HBM storage systems equipped with AI GPUs such as the Nvidia H100/H200 have become the absolute protagonists of the hardware-side procurement wave for global technology companies.

For example, Nvidia's H200 Tensor Core GPU will be used with the 24GB 8H HBM3E launched by Micron, and Nvidia's recently introduced next-generation AI GPUs B100/200 and GB200 based on the Blackwell GPU architecture will also have Micron and SK Hynix as suppliers of next-generation HBM3E storage systems.

According to information, the HBM3E capacity of each AI GPU system based on the Blackwell GPU architecture has increased by 33%, further proving why Micron has greatly benefited from this new super storage cycle.

Driven by almost unmet demand for artificial intelligence, data center GPU server shipments are expected to grow at a median to high digit rate in FY2024. As a result, Micron management provided promising results guidance for the third quarter of fiscal year 2024, with expected revenue of $6.6 billion (13.4% quarterly growth/76% year over year), and adjusted earnings per share of $0.45 (7.1% quarterly growth/131.4% year over year). This is not surprising, thanks to the low base effect associated with FY2023.

AI chip leader Nvidia also reported similar optimism, based on revenue guidance for the next quarter of $24 billion (8.5% quarterly up/ 233.7 percent year-on-year increase). These developments indicate that storage demand in data centers is likely to maintain healthy development, and it may absorb Micron's high inventory level of US$8.44 billion as of the second quarter of FY2024 (+2% month-on-month/+0.7% year-over-year/ +65.1 percent from FY2019's US$5.11 billion level) to support its long-term recovery.

The same optimism is also reflected in the forward-looking analysts' consensus. Analysts expect Micron to accelerate revenue/earnings per share recovery at a compound annual growth rate of +6.2%/+4.7% by the 2026 fiscal year. This is based on historical growth rates of +16.3% and +127.6% for FY2016 and FY2022, respectively, compared to the previous 2026 forecast of only +0.6%/-5.3%.

With the US government recently confirming up to $39 billion in chip law subsidies, and Micron may receive a $5 billion subsidy, the market does believe that the headwinds in the memory market are over.

Furthermore, as its HBM storage capacity is fully sold out in 2024, and the oversupplied HBM capacity allocation is received in 2025, we can understand why the market is increasingly optimistic about Micron's performance prospects as we enter the next storage supercycle.

No comparison no harm! Compared to South Korea's two major storage giants, Micron's valuation is much higher

As it stands, Micron's stock price has risen vertically by about 27% after the recent FY2024 second quarter results conference call, while the stock price has reached a record high, away from the 50-day/100-day/200-day moving average.

The current market values Micron's FWD EV/EBIT and FWD P/E are 21.58x/ 26.40x, respectively, but these figures are far higher than the 5-year FWD average of 14.85x/ 13.39x.

These figures bring Micron's valuation closer to Nvidia, the leader in the generative artificial intelligence market — the above valuation metrics based on current stock prices are 29.62x and 35.45x, respectively, while Microsoft (Microsoft), the majority shareholder of OpenAI, has the above valuation metrics of 29.63x and 36.06x, respectively. However, compared to Microsoft, which accounts for up to 95% of the AI chip field and whose business covers the fields of AI application software, cloud computing, PC hardware, and even the entire gaming ecosystem, the valuation of Micron, which simply relies on memory chips, is very expensive.

What is more noteworthy is that the valuation of Micron is far higher than that of the memory chip giants Samsung Electronics and SK Hynix from South Korea. In contrast, Samsung Electronics, which has many technology industries such as smartphones, tablets, PCs, and memory chips, is 12.33x/ 37.43x, respectively. The above valuation of SK Hynix, the current absolute leader in the HBM storage field, is only 10.68x/ 14.82x. Obviously, Micron's valuation is extremely expensive.

As far as HBM's market share is concerned, as of 2022, the market share of the three original manufacturers was SK Hynix 50%, Samsung Electronics about 40%, and Micron about 10%, respectively. Since SK Hynix was the first in the HBM field, it already entered this field as early as 2016, so it occupied the vast majority of the market share. Some industry insiders said that the share distribution in 2023 will be roughly the same as 2022.

Wall Street giant Goldman Sachs recently released a research report saying that due to stronger generative artificial intelligence (Gen AI) demand driving higher AI server shipments and higher HBM density in each GPU, the agency has greatly increased its overall HBM market size estimate. The market size is now expected to grow tenfold from 2022 to 2026 (4-year compound annual growth rate of 77%), from 2.3 billion US dollars in 2022 to 23 billion US dollars in 2026.

Goldman Sachs anticipates that the shortage of supply in the HBM market will continue in the next few years, and that major players such as SK Hynix, Samsung, and Micron will continue to benefit. Compared to competitors' solutions, Hynix has better productivity and yield. Goldman Sachs expects Hynix to maintain more than 50% of its market share for the next 2-3 years. Goldman Sachs continues to believe that Samsung is the only company in the world capable of providing one-stop HBM services, which may help it maintain its market share in the long term.

Taking into account headwinds in semiconductor demand and storage cycle adjustments over the past two years, Micron's earnings appear to be unstable. The market consensus forecast for FY2024 adjusted earnings per share is $0.70 (up 115.6% year over year). Even so, based on market consensus expectations of Micron's earnings of $10.05 per share for fiscal year 2026 and a 5-year average price-earnings ratio of 13.39x, the consensus long-term target price of $134.50 appears to have a very small margin of safety, or even close to 0.

According to the “margin of safety”, since Micron's stock price has reached a new historical peak, and based on a forward benchmark yield of only 0.38%, compared with the semiconductor industry median of 1.38%, and US Treasury yields as high as 4.52% to 5.38%, it does not provide a convincing dividend investment argument and a valuation level that can attract investors to hold for a long time.