Building AI infrastructure has been compared to railroads in scale and scope. There are certainly similarities. Both involve huge private capital investments relative to GDP at the time. Both changed our lives forever. In the case of AI, the biggest change so far has been in the efforts of some of the technology companies that are creating it.
consider micron technologies. Revenue has increased five times over the past two years and is expected to nearly double next year. Adjusted net income increased 10,686% over the same period. Next year’s expected net income is $179.2 billion, and the company had revenue of $791 million for the fiscal year ending Aug. 29, 2024. Adjusted net income increased 22,600% over three years. At this rate, imagine if you earned $250,000 in 2024, your income in 2027 would be $56.5 million. How long will this kind of growth continue? Investors are anxiously awaiting answers that may emerge when the company reports earnings this week.
As earnings approach (the company is scheduled to report its fiscal 2026 results on Wednesday), the options market is hinting at an upside or downside move of up to 6%. If that move seems modest, consider this. Given the company’s current market cap of $1.22 trillion, this move represents a $73.3 billion change in value.
This is believed to be greater than the market capitalization of General Motors, once the world’s largest company and still the 23rd largest company on the Fortune 500 list. We become immune to numbers that are too big to wrap our heads around. Here is another interesting comparison tool. This week’s implied move is equivalent to the entire value of Micron just three years ago. It’s clear that most of the streets don’t have a crystal ball that misses the mark so horribly.
Micron since the beginning of the year
Can the company move higher? Of course, but how much more can it go up when it’s already so valuable? It’s cheap compared to the futures multiple (which trades at less than 7 times expected 2027 earnings), but this includes exceptional gross margins. This profitability profile has historically sown the seeds for the next oversupply and subsequent margin collapse. Have you ever heard that “the best cure for high prices is high prices”?
So while the incredible business the company currently enjoys is likely to support it, 86% gross margins won’t last forever, and this puts this great company’s place in jeopardy. Strong results could lead to higher stock prices, but we don’t expect them to reach new highs by the end of the year. Even if the results are disappointing, they are likely to be surprising and a significant decline is unlikely. Recent price trends suggest that channel checks going into print are generally good.
trade
So what’s the deal? The stock is likely to stay within a range between its lows in recent months and its highs this year, making it a great bet to sell money puts and calls.
For example, a 900/1300 short strangle in November would collect ~$65 as of Friday’s close, or 6% of the current stock price over the next 7 weeks or so. This amounts to an annual interest rate of 40%. In the worst-case scenario, you could either go long the stock at $835 per share, a 23% discount to the current price, or short the stock at $1,365. This would make the stock 26% more expensive than it is now, increasing its value by nearly $320 billion and setting it at a new all-time high.
The break-even point is so far away from the current stock price, which is why this trade has a nearly 71% chance of making a profit
Disclosure: Tidal owns/holds all securities mentioned in the article.
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This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor.
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