AI demand accelerates and hits a capacity bottleneck! Citi: The memory supply shortage is far from over, raising its target for Micron Technology, Inc. (MU.US) to $1,300

Citi noted in its latest research report that it invited Micron Technology, Inc. (MU.US) CFO Mark Murphy and Director of Investor Relations Jeff Grattan to participate in investor meetings in Los Angeles. Overall, the bank believes that as hyperscalers' AI-driven demand continues to accelerate, the market is underestimating the extent to which DRAM/HBM supply may remain tight. At the same time, with the diminishing returns from process node scaling, memory manufacturers must rely on long-cycle greenfield capacity expansion. As a result, supply of HBM and advanced memory may remain tight through 2027 and 2028. The following are the main points summarized by Citi. AI demand: Customers continue to underestimate AI demand. AI payback is already very clear, and the overall credit situation/capacity situation remains strong. The incentive to use higher-capacity and higher-performance memory gives it a favorable differentiation advantage in terms of cost per token. In Citi's view, supply is the key factor the market is underestimating: density gains from process node transitions are diminishing (1-delta is about 25%, compared with 30%-40% for 1-gamma and prior nodes). HBM's conversion ratio consumes wafer capacity, while DRAM bit growth is only in the low-20% range. Truly alleviating supply pressure requires building entirely new fabs, which takes a long time, and cleanroom space is the limiting factor. Micron Technology, Inc.'s construction spending as a share of capital expenditure is approaching 50%. Visibility: Micron Technology, Inc. expects the DRAM supply-demand environment in 2027 and 2028 to be tighter than in 2026. Strategic Customer Agreements (SCAs) account for 35% of sales through 2030, and the company aims to raise this to about 50%. About 75% of non-SCA business is already contracted through 2027. HBM: Next year HBM margins will narrow relative to DRAM, and HBM growth is expected to outpace the overall DRAM market. Despecing is a phenomenon of supply scarcity that allocates available DRAM to more accelerators. Cash and capital: Micron Technology, Inc. generated exceptionally strong cash flow, producing about US$33 billion in free cash flow in the quarter ended August, while free cash flow in the quarter ended November will increase further. Management said that AI-driven demand and higher-value products (HBM, data center DRAM, SSD) are supporting significantly stronger cash generation than in previous memory cycles. Although Micron Technology, Inc. expects a substantial increase in capital expenditure for fiscal 2027 (Citi estimates more than US$50 billion) to support technology node transitions and manufacturing expansion, the company still expects to generate substantial free cash flow given the favorable industry backdrop. Micron Technology, Inc. recently approved a record US$35.2 billion share repurchase program. With the CHIPS Act restrictions expiring in December 2026, the company will significantly increase shareholder returns starting in December 2026. This repurchase authorization highlights management's confidence that the company will continue to generate strong free cash flow in a structurally tighter DRAM supply-demand environment in 2027-2028. Valuation: Citi rates Micron Technology, Inc. "Buy" with a target price of US$1,300, equivalent to about 8x expected 2027 earnings per share (EPS). This target price implies about 32% upside from the stock's Wednesday closing price of US$983.23. Given the current unprecedented pricing environment and the emergence of Strategic Customer Agreements (SCAs), this valuation represents a slight premium to Micron Technology, Inc.'s trading range in previous DRAM upcycles.