Micron Earnings to Test AI Trade as Options Imply $73 Billion Swing

The AI buildout has been compared to the railroads in scale and scope. Both involve enormous private capital investments relative to GDP in their era, and both have transformed how people live. In AI's case, CNBC said the biggest transformation so far has been in how some of the technology companies creating it live. Micron's revenues have quintupled in the past two years and are expected to nearly double again next year. Adjusted net income is up 10,686% over the period, and next year's anticipated net income is $179.2 billion versus $791 million in the fiscal year ended Aug. 29, 2024, a 22,600% increase in adjusted net income in three years, according to the CNBC article.

The options market's implied move of about 6% higher or lower may seem modest, but with a $1.22 trillion market capitalization it translates into a $73.3 billion change in value. CNBC said that is more than General Motors' market capitalization and equivalent to Micron's entire value just three years ago. Most of Wall Street does not have a crystal ball to miss the mark that badly, the article said.

The question is how much higher Micron can go after such a run. The stock is cheap relative to forward multiples, trading at less than seven times 2027 estimated earnings, but that includes extraordinary gross margins. CNBC said this profitability profile historically sows the seeds of the next supply glut and subsequent margin collapse, citing the adage that the best cure for high prices is high prices. The phenomenal business Micron currently enjoys will likely support it, but 86% gross margins do not last forever, which puts this great company about where it belongs. Strong earnings could help the stock jump, but CNBC said it does not expect new highs before year's end. Even disappointing results will likely be astonishing, meaning a pullback is unlikely to be severe. Recent price action also suggests channel checks going into the print have generally been positive.

The trade described in the CNBC article is a bet that the stock is likely range-bound between the lows of the past couple of months and the highs of the year, which is suited to selling out-of-the-money puts and calls. For example, a November 900/1300 short-strangle collects about $65 as of Friday's closing prices, or 6% of the current stock price over the next seven weeks or so, a 40% annualized rate of return. In the worst case, one either gets long the shares at $835 per share, a 23% discount to the current share price, or short the stock at $1,365, which would be 26% higher than the stock is now and an increase in value of nearly $320 billion, as well as a new all-time high. Because the breakevens are so far from the current stock price, the probability of profit on the trade is nearly 71%, according to the article.

The CNBC article disclosed that Tidal owns or holds all the securities mentioned in the article. It also stated that opinions expressed by CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, its parent company or affiliates.