MU is still cyclical; long-term agreements reduce but do not eliminate cycle risk from end markets and new capacity.

Is Micron no longer a recurring business activity? Is its stock no longer a periodic stock? Well, according to the company's assessment, that's still the case. Micron shares are trading at a forward price-to-earnings ratio in the single digits, or even in the mid-singles.

So, the market still rates Micron as a cyclical business.

However, many investors have begun to argue that it may not be a cyclical business activity. The management team has begun opening the door to discussion to convince investors to revalue the stock at a higher price based on the fact that it is no longer cyclical as it once was.

The justification used by the management team is their long-term agreements, which they call strategic customer agreements that extend to 2031. I think the CEO of Micron did a good job of emphasizing these long-term agreements to try to convince investors that the business is no longer cyclical.

Management says that multi-year "supply or pay" agreements enhance its long-term supply planning and increase the sustainability and predictability of our strong financial performance.

So, in a similar way, it benefits Micron because it allows them to know all this information and plan their business more effectively. It also benefits Micron's product buyers because they know how much product they can expect and at what time.

Management says it has signed 26 strategic agreements with customers, which it currently estimates will represent more than 35% of their revenue through 2030. Three-quarters of these estimated revenues have a defined pricing framework.

In other words, there is a minimum price you will get for Micron, and there is a maximum price you will get.

Well, this is one of the reasons why investors argue that Micron is no longer a cyclical business.

But the counter-argument, which supports the idea that it is cyclical, is that if you compare Micron's earnings per share over the past twelve months, you will find that it is more than 7 times higher than its previous peak.

You can look at the recent earnings per share over the past twelve months, which have risen to $74.21. The previous highest point was in 2019 when earnings per share were around $11.

So, when you achieve approximately 6 to 7 times your previous peak, and have shown up-and-down volatility in the past, investors will still evaluate your business as a cyclical enterprise.

Proponents of cyclical nature will say that buyers of these products will consume a large quantity over the next two years. We may not have reached the peak yet, and perhaps, I think it is likely that Micron's stock earnings will continue to rise over the next twelve months.

But after that peak, wherever it may be, whether it's 12 months, 18 months, 24 months, or 36 months from now, after the initial construction phase of the data centers, there will be a collapse.

There will come a moment when no new data centers will be built, and at that point Micron will depend on the next catalyst, which could be the automotive sector, or something else, or simply relying on the replacement cycle of all the data centers that have already been built.

Therefore, this will still generate a lot of profit and cash flow for Micron, but it may not be at the levels that Micron achieves today. Furthermore, there are large amounts of new production capacity in Micron's storage and memory product categories that will come into service over the next few years, with 2027, 2028, 2029 and 2030 bringing large amounts of production capacity.

Here, proponents of the cyclical nature argument point out that this action is still cyclical. If Micron is deemed no longer a cyclical business, that would justify a revaluation of the market multiple to be higher.

Therefore, instead of trading at a forward P/E ratio of 5.8, you might be trading at a forward P/E ratio of 10, 15, or 20, and this will lead to a rise in the share price, because if you look at the estimated earnings per share over the next twelve months and apply a higher multiple to it, the market price will rise much more.

My view on this situation is that this sector is still cyclical, but its cyclical nature has been reduced and expanded thanks to these long-term agreements. However, I still believe it will remain a cyclical sector due to the end markets to which the company supplies.

That will be an additional category for Micron now, added to the other categories it was already serving in the replacement cycle, right? The automotive sector may now be the next catalyst in 2028, 2029 or 2030 that boosts demand for Micron, so the peak may last longer than previous cycles.

Average selling prices are likely to moderate, if not decrease. This will therefore lead to a decrease or perhaps even a decline in Micron's revenues and sales.