Micron Just Broke the AI Doubt Trade: Record Margins, Locked-In Demand, and a Valuation That Still Doesn’t Make Sense

Micron Technology’s fiscal first-quarter results and, more importantly, its forward guidance delivered one of the clearest fundamental counterpoints yet to the recent slide in AI sentiment. The company didn’t just beat expectations; it reset the frame for what peak-cycle earnings and margins can look like in a structurally tighter memory market. Shares are up roughly 11% on the session, but the more important question for investors is whether Micron can hold those gains as broader enthusiasm around AI infrastructure has cooled into something closer to skepticism. Based on the guidance and commentary, Micron has given the market real reasons to believe this move is grounded in fundamentals rather than hype.

The headline numbers were exceptional, but they matter mainly as a bridge to what comes next. Micron posted adjusted EPS of $4.78 on revenue of $13.6 billion, both well ahead of consensus. The real shock came from the outlook: fiscal Q2 revenue guided to $18.3–$19.1 billion versus expectations closer to $14 billion, with adjusted EPS of $8.22–$8.62 and gross margins of 67–69%. That margin guide is the centerpiece of the story. At the midpoint, Micron is forecasting gross margins above its prior cycle peak from 2018, and doing so while still in the early innings of its HBM ramp and data-center-driven demand cycle.

Management was explicit about what is driving that margin expansion: higher pricing, lower costs, and a favorable product mix, with HBM at the center. This is not a one-quarter pricing spike. Micron emphasized that aggregate industry supply remains “substantially short of demand for the foreseeable future,” with tight conditions expected to persist beyond calendar 2026. That statement alone reframes the durability debate. In prior memory cycles, peak margins were quickly punished by aggressive capacity additions. This time, supply growth is constrained by cleanroom availability, longer lead times, and a far more disciplined capital allocation mindset across the industry.

DRAM remains the dominant earnings engine, accounting for nearly 80% of revenue, but the quality of that DRAM mix has changed materially. High-bandwidth memory is now the marginal profit driver. Micron has completed agreements on price and volume for its entire calendar 2026 HBM supply, including HBM4, effectively locking in visibility on both revenue and margins for its most strategic product line. Management now sees the HBM total addressable market growing at roughly a 40% CAGR through 2028, reaching $100 billion two years earlier than previously projected. Even maintaining its current share implies a multi-billion-dollar, high-margin revenue stream that did not exist in prior cycles.

NAND, often the more volatile sibling in Micron’s portfolio, also looks structurally healthier than in past upturns. Data center NAND revenue exceeded $1 billion in the quarter, with strong momentum across SSD portfolios. Management guided to calendar 2025 NAND bit demand growth in the high-teens, supported by enterprise and cloud workloads rather than consumer recovery hopes. Importantly, NAND pricing is improving alongside DRAM, benefiting from the same disciplined supply environment and cost-down execution at advanced nodes.

Margins, however, are where Micron is clearly differentiating itself from other AI beneficiaries. While Nvidia and Broadcom are guiding to either margin pressure or modest expansion from already elevated levels, Micron is still climbing the margin curve. The company exited the quarter at 56.8% gross margin and is guiding to roughly 68% next quarter. Operating margins are already pushing beyond 60%. Management acknowledged that future margin gains will likely be more gradual, but even stabilization at these levels would represent a step-change in Micron’s earnings power.

That earnings power feeds directly into the long-term CAGR discussion. Analysts are now modeling mid-to-high $30s in annual EPS over the next several years, with some stretch cases pushing toward $40–$50 depending on pricing and mix. Even assuming moderation after fiscal 2026, Micron’s earnings base appears structurally higher than in any prior cycle, supported by multiyear customer agreements, AI-driven demand, and constrained supply growth. This is why multiple firms raised price targets aggressively while still arguing the stock does not fully reflect the new earnings profile.

Valuation is the quiet but critical part of the bull case. Despite the rally, Micron trades at a mid-teens multiple on forward earnings and well below many AI-adjacent peers on both P/E and EV-based metrics. Several analysts point out that the stock is still valued closer to a mid-cycle memory company than a structurally improved, cash-generative AI infrastructure supplier. With free cash flow margins approaching 30% and the balance sheet back to net cash, Micron has flexibility to retire debt, buy back stock more meaningfully once CHIPS Act constraints ease, and potentially grow its dividend over time.

The broader AI backdrop adds nuance to the market reaction. Micron’s results landed alongside reports that OpenAI is exploring a funding round valuing the company near $750 billion. That headline has reignited interest across parts of the AI complex, but it has not reversed the broader trend of skepticism around hyperscaler spending, capital intensity, and return on investment. For now, this still looks like a bounce rather than a clean reversal in AI sentiment. That makes Micron’s ability to hold its gains especially important. Unlike more speculative AI plays, Micron is delivering tangible pricing power, margin expansion, and earnings visibility today.

In that sense, Micron’s quarter may serve as a litmus test for what investors still want from AI exposure. The company is not selling a distant promise; it is monetizing demand in real time, with contracts in hand and margins expanding into record territory. If the stock can consolidate and hold these levels while broader AI enthusiasm remains fragile, it would reinforce the idea that Micron is being re-rated on fundamentals rather than momentum.

The takeaway is straightforward but powerful. Micron is no longer just a leveraged play on an unpredictable memory cycle. Management has made a credible case that this cycle is structurally different, driven by AI workloads that are memory-bound, long-lived, and less sensitive to short-term macro swings. With guidance pointing to record margins, accelerating earnings, and sustained demand across DRAM and NAND, Micron has positioned itself as one of the few AI beneficiaries where valuation, visibility, and execution are all moving in the same direction. In a market increasingly wary of AI excess, that combination matters more than ever.