Micron (MU) Earns 87% Gross Margins. Is This the Top?

Friday’s 5.3% fall left Micron at 5 times expected earnings, a price that already assumes today’s profits fade: it is a solid business at the top of its cycle, and whether its new multi-year contracts soften the next downturn decides whether that price is too gloomy.

How it got here

Micron (MU), founded in Boise, Idaho, in 1978, is one of three companies that make most of the world’s DRAM, the working memory in every computer, alongside Samsung and SK hynix. It also makes NAND flash, the chips that store data. Memory is close to a commodity, so the business swings with supply: when chips run short, prices and profits jump, and when the makers’ new factories arrive, both collapse.

Its last two booms ended that way. Profits peaked in fiscal 2018 and again in fiscal 2022, and within a year or two Micron was earning a fraction as much, or losing money. Then AI changed what memory is worth: Nvidia’s processors need stacks of high-bandwidth memory (HBM), and making it crowds out the supply of ordinary DRAM.

On 30 September Micron reported fiscal 2026 revenue of $133.2 billion, more than three times the year before, and Chairman and Chief Executive Sanjay Mehrotra said he expects “an even stronger fiscal 2027.” Yet the stock closed Friday 27.1% below its 25 June high.

Are 87% gross margins Micron’s new normal, or the top of another cycle?

The business in one line

Cloud companies, server makers, and phone and PC makers buy Micron’s memory and storage chips, now partly under multi-year take-or-pay contracts that fix volumes and set price bands, rather than one quarter at a time.

How it makes money

DRAM brought in $100.7 billion of fiscal 2026 revenue, about three-quarters, and NAND flash $31.8 billion, the annual report shows. Micron sorts its customers into four units:

The two data-center units made up 60.6% of sales. About half of revenue came from its ten largest customers in each of the last three years, the annual report says.

Source: Micron SEC filings

Revenue has risen in all but one of the last 11 quarters, and Micron expects about $61.5 billion this quarter, its guidance shows.

The numbers that matter

Growth: sales more than tripled in fiscal 2026

Revenue in the year to 3 September was 3.6 times fiscal 2025’s. But Micron’s growth comes in lurches: sales fell in three of the last nine fiscal years, by half in fiscal 2023. Strong today, then, but this is cyclical growth, not compounding.

Profitability: the highest operating margin in tech

Micron’s operating margin was 74.6% in fiscal 2026, the highest of any information-technology company in our fundamentals data. Nvidia (NVDA), the next-best chipmaker by that measure, managed 65.2% over its last 12 months.

History is the problem. Each of Micron’s last two margin peaks gave way to a slump within two years, and in fiscal 2023 its operating loss came to 37.0% of sales.

Source: Micron SEC filings

Cash: $59.0 billion of free cash flow in a year

Free cash flow, the cash left after paying for factories and equipment, was $59.0 billion in fiscal 2026. That’s more than three times what Micron produced in the previous nine years combined, by our sum of its SEC figures.

Little of it went to shareholders: buybacks and dividends came to about $1.3 billion, while Micron repaid $10.0 billion of debt and kept the rest. For a business that lost money three years ago, we think that’s the right order.

Balance sheet: about $68 billion of net cash

Micron ended the fiscal year with $73.5 billion of cash and investments against $5.2 billion of debt, its results release shows.

That net cash would cover more than two years of fiscal 2026’s capital spending, enough to keep building through a downturn without borrowing.

Why the stock is where it is

Here is the case from the worried investor’s side.

1. The cycle looks late. Micron’s shares peaked on 25 June and were 22.7% below that close by 7 July, when Yahoo Finance declared a bear market in memory stocks. Pzena Investment Management had argued in May that memory margins are “likely to mark the peak of the current cycle.”
2. China is building. CNBC reported on 15 October that a new chip design from China’s CXMT and fears of a glut in 2029 were hitting memory stocks. Micron fell 19.2% from 7 October to 16 October, by our price files.
3. The price increases are shrinking. TrendForce expects DRAM contract prices to rise 10% to 15% this quarter, a fraction of the first quarter’s jump. Micron’s own guide calls for an adjusted gross margin of about 86.25%, a touch below the quarter it just reported.
4. Its customers are strained. Alphabet and Meta burned cash last quarter, and on 29 October Intel blamed memory shortages for weak PC demand. Micron fell 5.3% the next day as chip stocks slid.

Testing the worry

The late cycle: lasting, but probably shallower. Micron’s annual report describes take-or-pay contracts with binding volumes over several years, prices “subject to minimum and maximum bands,” and cash deposits from customers. Counterpoint Research’s Jeongku Choi told CNBC on 15 October that such deals mean “the down cycle will differ from previous ones,” though Counterpoint still expects DRAM prices to fall about 23% in 2028. We weigh how much of 2027 is already booked in our story on AI memory.

China: real, but later. Kyung Kye-hyun, a former head of Samsung’s chip division, said in May that Chinese output could push prices down from late 2027 or early 2028, Notebookcheck and PC Gamer reported. Rosenblatt Securities’ Kevin Cassidy told CNBC that CXMT’s new design won’t “swing the supply-demand equation at all,” and Quilter Cheviot’s Ben Barringer questioned its yields.

Shrinking increases: not yet a fall. Prices are still rising, and Micron’s guide implies revenue up about 13% this quarter, by our arithmetic. Part of the slowdown comes from contract terms: TrendForce says some suppliers’ server prices will lag the market under long-term deals, and the same bands that cap the rises limit the falls.

Strained customers: spreading in PCs and phones, contained in data centers so far. Intel’s warning and a 29% drop in Sandisk’s (SNDK) consumer sales, which its management tied to higher prices, show costlier memory is cutting into consumer demand. Phones and PCs are 27.5% of Micron’s sales.

Data-center buyers are still spending: Amazon expects capital spending of about $220 billion this year.

The worry that survives is the first. The contracts may soften the next downturn, but they don’t prevent one, and Counterpoint expects it to start in 2028.

The moat

Micron’s moat is membership of a three-company club, not dominance within it.

1. Scale in a three-way market. Samsung, SK hynix and Micron took 87.6% of DRAM revenue in the second quarter, TrendForce estimates.
2. HBM know-how. Micron is in volume production of HBM4 alongside Samsung and SK hynix, and has been making it for Nvidia’s Vera Rubin platform since March, SiliconANGLE and Tiger Brokers’ news service reported.
3. Contracts and cash. Take-or-pay agreements backed by customer deposits, and about $68 billion of net cash to keep investing through a slump.

The club keeps newcomers out of HBM for now. It didn’t stop Micron’s 2023 slump.

The risks we’d watch

1. A price reset in 2028. Counterpoint expects DRAM prices to fall about 23% that year. If Micron’s prices fell that much from this quarter’s guide, with volumes and costs unchanged, its operating profit would drop by roughly 28%, by our arithmetic; a 2023-style collapse, when revenue halved, would do far more damage.
2. A few big buyers. The data-center units were 60.6% of fiscal 2026 sales, and about half of revenue came from ten customers. If data-center buyers cut their memory purchases by a fifth, Micron would lose about 12% of its sales.
3. Its own building boom. Micron spent $30.7 billion on plant and equipment in fiscal 2026, nearly double fiscal 2025, and Mehrotra said in the results release: “We are increasing our investments in technology, products and manufacturing.” If revenue halved, as it did in fiscal 2023, that spending would eat 46% of it.

What the price assumes

We compare Micron with Sandisk, Western Digital (WDC), the hard-drive maker, and Nvidia, using Friday’s close, SEC diluted earnings and CNBC’s quote data.

The median S&P 500 stock in our data trades at 23.5 times trailing and 19.0 times forward earnings.

At 5.0 times expected earnings, the price assumes Micron’s profits shrink sharply after the next year. Before this month, the last time its trailing P/E was this low was March 2023, three months before its 12-month earnings turned into a loss.

Put another way, at its median multiple of 21.2, today’s price would match earnings of about $42 a share, roughly a quarter of what analysts expect over the next 12 months, by our arithmetic.

Our verdict

Business: Solid. Price: Below its usual price. Micron earns the highest operating margin in tech in our data, holds about $68 billion of net cash, and sells part of its output under take-or-pay contracts with price floors. We call the business solid rather than strong because it lost money as recently as fiscal 2023, and those contracts have never been tested in a downturn.

At 11.9 times trailing earnings, below its usual multiple, the stock is cheap on paper, but cheap is what memory stocks look like at the top. What would change our mind on the business: a gross margin below the 86.25% guide when Micron reports in December, which would suggest the price bands are already binding.

A business at its best moment, priced as if the moment won’t last.