Has Micron Stock Peaked Here? Its Future Valuation Metric May Surprise the Market

For example, it is not uncommon for many technology stocks, especially in the hardware side of AI-demand-driven stocks, to have a 3.0% FCF yield metric, or lower.

For example, Nvidia generated slightly over $119 billion in trailing 12-month (TTM) free cash flow, according to Stock Analysis. Today, its market cap is $5.298 trillion. So, its FCF yield is:

$119b / $5,298 = 0.02246/100 = 2.246% FCF yield

This means that, theoretically, if Nvidia were to pay out 100% of its FCF to shareholders in dividends (even though it does so with buybacks as well), the dividend yield would be 2.246%.

That is less than half the 5.0% FCF yield that I am using for the Micron valuation. In other words, using a 2.5% FCF yield metric, MU could be worth over twice its present market value:

$51b FY 27 FCF / 0.025 = $2,040 billion (i.e., $2.04 trillion)

Analysts and the market have been reluctant to value Micron and other memory product makers at this lower FCF yield. They don’t expect that Micron would eventually have a 2.5% dividend yield (assuming a 100% FCF payout), vs. its present 5.0% yield.

One reason is that the industry has been very cyclical. For example, as soon as the industry builds out capacity to meet present AI-driven demand, memory device prices could drop considerably.

Ultimate Potential Upside

However, if the market determines that device demand is set to continue climbing over the next 3 to 5 years, rather than just 1 to 3 years, the valuation metric could start to rise towards a 3.0% FCF yield or so.

That shows that a potential upside for Micron over the next year could be startlingly higher.

For example, let’s say that in one year Micron’s expected FCF is $65 billion in the following year (FY 28) and the market is willing to give Micron a 3.0% FCF yield:

$65b / 0.03 = $2,167 billion (i.e., $2.167 trillion)

That is still 91% higher than Micron’s valuation today of $1.137 trillion. In other words, Micron’s PT next year could be $1,952 (i.e., $1.91 x $1,022 price today).

And during this whole period, analysts will constantly be playing catch-up with their target prices, as they may not be willing to give Micron a similar FCF yield to Nividia, or even close to it.

So, the bottom line here is that if AI-driven demand continues to drive up memory device prices higher than the market expects, Micron’s FCF yield will keep falling. That will push its valuation higher.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com