When it comes to artificial intelligence, it’s difficult not to mention the so-called “headline” enterprises. However, AI requires a holistic effort, and that’s where computer memory and data storage specialist Micron Technology (NASDAQ:MU) enters the stage. It might not have the pizzazz of some other players in the digitalized intelligence game, yet it offers critical stagehand services – services that keep the show running. I am near-term bullish on MU stock, particularly its call options.
MU Stock Benefits from Overlooked Fundamentals
Mention AI and it’s impossible not to talk about Nvidia (NASDAQ:NVDA). Due to the intensive calculations involved, Nvidia’s graphics processing units have understandably become all the rage. Still, AI isn’t just about GPUs. You need other semiconductor components to make the entire product work seamlessly. And that’s the fundamental draw for MU stock.
According to Bank of America (NYSE:BAC) Securities analyst Vivek Arya, Micron stands to benefit from surging demand for AI. Primarily, the tech giant offers high-bandwidth memory (HBM) chip technology, which, as TipRanks reporter Radhika Saraogi writes, “serves as a crucial component in AI servers.”
Arya anticipates that the HBM market will expand at a compound annual growth rate of 48% by 2027, subsequently reaching a valuation of over $20 billion. Further, the expert forecasts that Micron will increase its market share in the HBM space from less than 5% to the mid-20% level. This dynamic should drive the tech firm’s revenue to record levels in 2025 and 2026.
Further, Vivek believes that the broader integration of AI will work its way toward higher-spec smartphones, PCs, and other smart or connected devices. As such, this development should boost demand for Micron’s memory chips, organically lifting MU stock.
It’s important to understand that AI as a whole doesn’t operate in a vacuum. If digital intelligence represents a fully-functioning car, then the GPU may roughly be the equivalent of the engine. However, a strong engine alone doesn’t translate to excellent performance. After all, you must transfer that power to the wheels.
That’s where the memory component comes in, which is loosely the equivalent of a car’s transmission. Essentially, Micron’s advanced memory chips help put the power down, making it an invaluable component for AI or any advanced computing protocol. So, while everybody is putting the spotlight on NVDA, MU stock potentially offers the better relative deal.
Micron Call Options Beckon
With the importance of Micron’s products established, Arya rated MU stock a Buy with a $144 price target. That implies 17% upside potential from the current price. It’s arguably not an unrealistic expectation based on broader analyst sentiment.
For Fiscal 2024, Wall Street forecasts Micron to deliver earnings per share of 82 cents on revenue of $24.51 billion. That’s a massive improvement over last year’s loss of $4.45 per share. In addition, top-line growth would come out to 57.7% against last year’s tally of $15.54 billion.
Keep in mind these are average estimates. Regarding the most optimistic target, EPS could hit $1.34 on sales of $25.35 billion. So, no matter how you look at it, MU stock is poised for significant growth based on AI euphoria.
If you believe that the trend will play out according to plan, then MU stock call options look mighty attractive. In particular, there was significant demand for the Jul 19 ’24 130.00 Call. On Friday, volume hit 1,204 contracts against an open interest reading of 7,377 contracts. Due in part to the volume boost, the bid-ask spread (as represented by the midpoint price) at the time was less than 1%.
Of course, the spread is subject to change on a day-to-day basis. However, the $130 strike price is attractive in that it represents a psychologically important round number. Traders have long noticed a tendency for the market to move toward round numbers. More important than this technical argument, it’s anchored to fundamental enthusiasm.
With memory chips playing an absolutely vital role in AI, Nvidia can help lift all boats in the digital intelligence ecosystem. Therefore, it’s more than possible that MU stock could ride the coattails.
MU Stock: Play the Relative Valuation Game
To be quite blunt, I’m not comfortable bidding up Nvidia or related GPU enterprises. With a price-to-sales (PS) ratio of 36x, that’s a hefty premium to pay for the company’s revenue. Sure, analysts anticipate sales growth of 80.7% for the current fiscal year, but that’s still quite a risk.
On the other hand, MU trades hands for “only” 7.4x trailing-year sales. Is that still rich? You bet – the semiconductor sector runs an average sales multiple of roughly 4.1x. However, the projected sales growth for the current fiscal year stands at nearly 58%. That’s a more palatable risk for discerning speculators.
Is MU Stock a Buy, According to Analysts?
Turning to Wall Street, MU stock has a Strong Buy consensus rating based on 25 Buys, one Hold, and one Sell rating. The average MU stock price target is $126.96, implying 3.3% upside potential.
The Takeaway: MU Stock Offers Solid Relative Value
If you want to participate in the AI rally but don’t want to pay full retail, so to speak, then MU stock – particularly its call options – brings much to the table. Essentially, the upside projections for the security are backed by robust fundamentals. Since Micron’s advanced memory chips are vital for the proper working of AI and other advanced protocols, it should see increased demand.
