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Shares of memory chipmaker Micron Technology (NASDAQ:MU) have had a tough few months. The stock closed at a record $1,213.56 on June 25 and is around $715 as I write -- still about 40% off that high.
After a slide like that, most investors wonder when to buy. I've called the stock a buy more than once this fall, and I still think it's worth buying at today's price.
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But when a company's profits can swing as much as Micron's, I think it's just as helpful to decide beforehand when the stock would be too expensive to hold.
For me, that level is around $1,050 a share, or about 47% over $715. Here's how I got there.
Micron's non-GAAP (adjusted) earnings were $75.52 per share in fiscal 2026, which ended Sept. 3. For fiscal 2027, analysts' consensus estimates call for about $176 -- more than twice that record.
At roughly $715, shares cost about 4 times those expected earnings, an extremely low price-to-earnings ratio for any growth stock. In other words, investors don't seem to trust these profits to last.
And the $176 might prove too high. Management's forecast for the fiscal first quarter of 2027 calls for $38.15 in adjusted earnings per share, plus or minus $1. To hit $176, Micron would have to average around $46 a share in the three quarters after that, or about 21% over the guide. But growth is slowing. Adjusted earnings per share climbed 33% sequentially in the fiscal fourth quarter of 2026 (the period ending Sept. 3), and the guide implies a gain of around 14% in fiscal Q1. What's more, Micron's DRAM prices climbed by a high-teens percentage sequentially in fiscal Q4, down from a low-60s percentage gain in fiscal Q3.
To be fair, management expects sequential revenue growth in every quarter of fiscal 2027 and called fiscal Q1 the low for gross margin this fiscal year. But it's still a lot of growth to rely on from a product whose price can drop fast.
Micron's own history shows the valuation investors have paid when memory profits were booming. The stock closed at $62.62 on May 29, 2018, its peak for that cycle. That was about 5 times what the company ultimately earned on an adjusted basis in fiscal 2018 ($11.95 per share).
In its next boom, the stock closed at $97.36 on Jan. 14, 2022, or around 12 times what it later earned on an adjusted basis in fiscal 2022 ($8.35 per share).
The gap seems to boil down to how high profits had risen. Micron's adjusted gross margin was 59% in fiscal 2018, versus 46% in fiscal 2022.
And investors had good reason to doubt those profits. After all, adjusted earnings per share dropped 47% to $6.35 in fiscal 2019, and fiscal 2023 saw an adjusted loss of $4.45 per share.
Today's profits look much higher than either. Micron's adjusted gross margin reached 87% in fiscal Q4, up from 46% a year before. I'd lean closer to 2018's price-to-earnings ratio and use around 6 times fiscal 2027 earnings.
I'd go a bit over 2018's level because Micron arguably has more protection this time. It has signed 26 multiyear strategic customer agreements, with customers agreeing to $32 billion in financial commitments, primarily cash deposits.
Six times $176 comes to about $1,056, which I'd round down to $1,050. That's roughly 13% below the stock's June record close, so Micron wouldn't have to hit a new high for me to think it's too expensive.
My sell price tracks the estimate. Every $10 added to expected fiscal 2027 earnings per share would boost it by $60, so a strong fiscal Q1 report could raise it. If estimates fell to around $153 (the fiscal Q1 guide times four), my price would drop to about $920.
That price-to-earnings ratio could change too. If Micron's agreements covered much more of its revenue than they do today, I could justify paying more per dollar of earnings. And if DRAM prices start falling from quarter to quarter, I wouldn't wait for $1,050 at all.
For now, at around 4 times expected earnings, selling looks premature to me. Sure, there's no guarantee Micron hits $1,050 before profits start falling. I'd just keep close tabs on DRAM prices in the meantime.
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Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.
I Still Think Micron Stock Is a Buy. Here's the Price at Which I'd Sell It. was originally published by The Motley Fool
