Micron's Stock Undervalued Despite Nvidia Earnings Boost

Nvidia's recent earnings report has provided a significant boost to Micron Technology's (MU) stock, despite the fact that it still trades at six times its fiscal 2027 consensus earnings estimate. This is significantly lower than the semiconductor industry forward P/E median of 29.18.

The main reason for this disparity is the market's cyclical assumptions, which are based on a repeat of the historical DRAM boom-bust cycle. In this scenario, memory manufacturers build capacity simultaneously during an upturn, flood the market, and watch prices collapse. However, Nvidia's CFO Colette Kress disclosed that memory prices have blown past what the company had modeled, and will compress gross margins from 75% in the second quarter to a trough of 71% to 72% by the fourth quarter of fiscal 2027.

Nvidia has committed to paying premium prices for memory, with procurement obligations growing to $279 billion, up from $119 billion the prior quarter. This translates to a single percentage point of gross margin representing roughly $1.1 billion in revenue. The fact that Micron's stock is undervalued and currently trading at six times its earnings estimate suggests that the market is pricing in a high probability that those earnings projections will not materialize.