Micron's AI Memory Play: Riding DRAM Gains Amid NAND Headwinds

Micron Technology's fiscal third quarter 2025 earnings, released on June 25, underscored its transformation into a key beneficiary of the AI revolution. While the company's record $9.3 billion in revenue and 39% non-GAAP gross margin highlight its prowess in memory chips, the results also reveal a stark dichotomy: its AI-driven DRAM business is booming, but NAND remains a drag on margins. For investors, the question is whether Micron's strategic bets on high-bandwidth memory (HBM) and advanced DRAM technologies can offset near-term NAND challenges—and whether the stock's valuation offers a compelling entry point ahead of its AI-driven growth spurt.

Ask Aime: Can Micron's Q3 earnings justify its AI-driven growth strategy?

The DRAM Surge: AI's Fuel

Micron's DRAM revenue surged to $7.1 billion in Q3, a 51% year-over-year jump, driven by soaring demand for HBM, the specialized memory used in AI accelerators like NVIDIA's H100 and AMD's Instinct GPUs. HBM revenue alone grew nearly 50% sequentially, with a run rate now exceeding $6 billion. The company's HBM3E product, which delivers 3-4 times the bandwidth of standard DRAM, is “sold out” for 2025, with Micron expecting its HBM sales to match its overall DRAM market share by late 2025.

This dominance stems from strategic partnerships. Micron supplies HBM to NVIDIA and AMD, whose AI chips power large language models and generative AI systems. The company also hinted at HBM4 samples being sent to customers this year, promising 60% higher bandwidth than HBM3e by 2026. With AI chipmakers like NVIDIA forecasting HBM demand to “significantly exceed” overall DRAM growth in 2026, Micron's leadership in this niche could underpin sustained margin expansion.

Margin magic: Micron's non-GAAP gross margin rose 110 basis points sequentially to 39%, driven by better-than-expected pricing and product mix. The company's advanced DRAM nodes, such as its One Gamma process (offering 30% higher bit density than its predecessor), are ramping faster than prior generations. First qualification samples have already shipped, positioning Micron to capture a larger share of high-performance DRAM markets.

NAND's Headwinds: A Drag, But Manageable

While DRAM shines, NAND faces headwinds. Revenue rose 16% sequentially to $2.2 billion, but prices fell in the high single digits due to oversupply in legacy technologies. Micron is addressing this by reducing legacy NAND capacity by 10% by fiscal 2025's end and shifting to higher-bit-density G9 NAND, which now accounts for a record QLC mix in SSDs.

The NAND drag is reflected in the company's Q3 gross margin: NAND's lower pricing and slower bit growth weighed on overall profitability, though DRAM's strength offset much of the pain. Looking ahead, NAND's challenges could persist in 2026 if oversupply in the broader NAND market continues, especially as competitors like Samsung and SK Hynix also scale advanced nodes.

Strategic Investments: Positioning for AI's Next Phase

Micron's $200 billion U.S. manufacturing plan—a 20-year bet on domestic chip production—aims to solidify its AI leadership. Its Boise, Idaho, facility (ID1) targets DRAM production by late 2027, while plans for a second Boise fab (ID2) and expansions in Manassas, Virginia, underscore its commitment to scaling AI-centric memory.

The company's fiscal 2025 capital spending of $14 billion will prioritize HBM, advanced DRAM, and R&D. This focus aligns with its Q4 guidance: revenue is projected to jump 15% sequentially to $10.7 billion, with non-GAAP gross margin rising to 42%.

Valuation: A Discounted Play on AI's Future

Despite its strong results, Micron's stock trades at a valuation discount to peers like Samsung (which trades at ~12x forward P/E) and SK Hynix (~8x). Micron's forward P/E is ~10x, reflecting concerns over NAND and cyclical memory demand. However, the company's free cash flow hit a six-year high of $1.95 billion in Q3, and its $12.2 billion in cash positions it to weather near-term NAND headwinds.

Investment Thesis: Buy on AI's Tailwinds

The bull case rests on Micron's AI-driven DRAM dominance. HBM's structural demand, advanced node leadership, and partnerships with AI leaders like NVIDIA suggest that Micron's DRAM revenue could grow at a 20-30% annual clip through 2026. Meanwhile, NAND's drag is manageable as Micron scales G9 NAND and reduces legacy capacity.

Even if NAND prices remain soft, DRAM's pricing stability and mix improvements—aided by One Gamma and HBM4—could push non-GAAP gross margins toward 45% by late 2026. With a $14 billion market cap and a potential $130+ price target (assuming 15x 2026 EPS of $8.70), Micron offers a compelling risk-reward.

Risks: Overhangs Linger

Bear risks include:
1. NAND oversupply: If global NAND supply outpaces demand in 2026, Micron's margins could compress further.
2. AI demand moderation: A slowdown in AI chip adoption or competition from alternative memory (e.g., CXL) could dent HBM's growth.
3. U.S. manufacturing costs: The $200 billion investment plan's execution risks could strain cash flow.

Conclusion: A Buy on AI's Long Game

Micron's Q3 results confirm its position as a critical supplier to the AI ecosystem. While NAND remains a near-term concern, its strategic bets on HBM and advanced DRAM are positioned to deliver margin expansion and revenue growth. With a discounted valuation and a path to $130+ by 2026, investors should consider buying Micron ahead of its AI-driven ascent.

Rating: Buy
Price Target by 2026: $130+