This growth stock trades at a 90% discount to its peers

I’m getting a little dubious about the valuation of many growth stocks, especially those with artificial intelligence (AI) exposure. Micron Technology (NASDAQ:MU) is a growth stock and it certainly has exposure to AI, but its valuation remains compelling despite the rise in its share price.

Let’s take a closer look.

Supportive trends

Micron’s shares are up 81% over 12 months. This has been driven by earnings growth which, in turn, has been driven by soaring demand for high-bandwidth memory and next-generation SSDs (Solid State Drives) essential for large model training, inference, and data lake management. In other words, AI is a huge supportive trend.

The firm’s HBM3E and HBM4 products, offering power efficiency and enormous bandwidth, drive adoption in Nvidia and AMD AI accelerators, while new DDR5 modules and LPDDR5X cater to both data centre and edge AI devices.

Now, what I find particularly interesting is that the memory business has typically been cyclical. However, the current wave of AI demand is fundamentally altering this pattern, as cloud providers and data centre operators seek more frequent, large-scale upgrades to high-bandwidth DRAM and advanced NAND solutions to keep up with rapidly advancing AI workloads. 

Another factor in the intensity of AI workloads. Historically, these memory chips can last a long time, but memory chips in AI servers could wear out much faster (one to three years). This means more frequent replacement cycles and less cyclical demand.

What’s more, while Micron isn’t the biggest player in memory chips, it’s possibly the best positioned for AI.

The numbers are the exciting bit

This is all great, but if Micron were trading at 50 times forward earnings and only offered 20% annualised growth in the coming years, it wouldn’t be worth considering — well, not for me anyway.

However, that’s not the case. The stock trades at 11.5 times forward earnings. That’s a 63% discount to the information technology sector average. That alone suggests some form of mis-pricing.

Then, there’s the price-to-earnings-to-growth (PEG) ratio. This is the forward price-to-earnings (P/E) ratio (11.5) divided by the average expected earnings growth rate for the medium term (65.8%).

The PEG figure we’re left with is 0.18. That’s a huge 90% discount to the sector average. It might be a little distorted, but the underlying numbers still point to a huge undervaluation.

For context, earnings per share are expected to rise from around $8.29 last year to $16.63 this year. It then moves to $18.90 in 2027, representing further strong growth.

Analysts remain somewhat uncertain about what happens next. One risk is that my assumption — that this marks the end of the company’s cyclical nature — could prove incorrect. The share price would likely take a major hit if AI demand turns out to be cyclical, much like what happened in consumer electronics with PCs and smartphones.

Personally, however, I believe the data suggests it’s a stock worth considering.

The post This growth stock trades at a 90% discount to its peers appeared first on The Motley Fool UK.

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James Fox has positions in Nvidia and Micron Technology. The Motley Fool UK has recommended Advanced Micro Devices and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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