Micron Just Revealed a New Business Strategy. That Change Makes It a Screaming Buy.
Key Points
Micron's stock is dirt cheap because the market is still worried about a downturn.
Micron is taking steps to stabilize its business.
Micron (NASDAQ: MU) is changing its business. Since the start, Micron has made memory chips, and their prices are dictated by market demand. When times are good (like they are now), Micron can make a fortune. When times are bad, Micron's business looks helpless. However, Micron is using today's memory chip demand wave to reform its business.
I think this shift makes Micron a different stock than it has historically been viewed as, making it a no-brainer buy today.
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Micron is moving toward contract-based revenue
Because all available production capacity has been consumed by AI companies building data centers, supply is scarce. This has caused memory chip prices to rise, and those building out data centers are feeling the heat. However, Micron may not care a lot. Previously, Micron's clients would buy memory chips as needed, leaving Micron to figure out when demand curves would start and end.
This made planning for the future incredibly difficult, which is why it didn't have the production capacity ready to go to meet the massive demand wave. This is in contrast to logic chip manufacturers like Taiwan Semiconductor (NYSE: TSM), which have contractual agreements that help them understand future demand.
However, Micron is now shifting its business toward that. It has signed several multi-year agreements through 2030 that set floor and ceiling prices on memory chips, and has now locked in about 35% of revenue through 2030. This is a huge deal for Micron, as it will smooth out its business and reduce investors' concerns about cyclical downturns when demand is lower. While Micron may not have the same strong results it's producing today, the floor will be much higher, leading to a more stable business that mirrors its logic-chip peers, like TSMC.
Currently, TSMC trades at 24 times forward earnings, while Micron stock changes hands at just 5.1 times forward earnings.
MU PE Ratio (Forward) data by YCharts. PE = price-to-earnings.
Should the market realize that Micron's business is transforming into a more sustainable one, Micron's stock could undergo a dramatic repricing, delivering incredible returns in a very short time frame. That would make Micron a perfect stock to scoop up now, and I think prudent investors should take advantage of that while it's beaten down.
Eventually, the market will realize that Micron is a solid long-term investment due to this business model shift, and that it deserves a more average multiple, rather than a huge discount.
Keithen Drury has positions in Micron Technology and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Micron Technology and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.