The AI infrastructure buildout has been compared to the railroads in scale and scope. There are certainly similarities. Both involve enormous private capital investments relative to GDP in their era. Both have transformed how we live. In AI’s case, the biggest transformation so far has been in how some of the technology companies creating it live.
Consider Micron Technologies. 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. Next year’s anticipated net income is $179.2 billion versus $791 million the company made in fiscal year ended August 29th, 2024. 22,600% increase in adjusted net income in three years. Imagine, at that rate, if you earned $250,000 in 2024, your income in 2027 would be $56.5 million. How long can that kind of growth last? Investors eagerly await answers that might be revealed when the company reports earnings this week.
As earnings approach – the company will report its FYE2026 results Wednesday – options markets imply a move of ~6% higher or lower. If that move seems modest, consider this. Given the company’s current $1.22 trillion market capitalization, that move translates to a $73.3 billion change in value.
For perspective, that is more than General Motors’ market capitalization, the one-time largest company in the world, and even now still the 23rd largest company on the Fortune 500 list. We become immune to numbers too large to wrap our heads around; here’s another interesting comparator. The implied move this coming week is equivalent to Micron’s entire value just three years ago. Pretty clear most of the street doesn’t have a crystal ball to miss the mark that badly.
Micron, YTD
Can the company go higher? Sure, but how much higher when the value is already so high? It’s cheap relative to forward multiples (it’s trading <7x 2027 estimated earnings), but that includes extraordinary gross margins. This profitability profile historically sows the seeds of the next supply glut and subsequent margin collapse. Ever heard “the best cure for high prices is high prices”?
So, the phenomenal business the company is currently enjoying will likely support it, but 86% gross margins don’t last forever, which puts this great company about where it belongs. Strong earnings could help it jump, but I don’t 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
So, what’s the trade? 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 perfect for selling out of the money puts and calls.
For example, a November 900/1300 short-strangle collects ~$65 as of Friday’s closing prices, or 6% of the current stock price over the next 7 weeks or so. That’s a 40% annualized rate of return. In the worst-case scenario, 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 not only be 26% higher than the stock is now and an increase in value of nearly $320 billion, but it would also be a new all-time high.
That the breakevens are so far from the current stock price is the reason the probability of profit on this trade is nearly 71%
Disclosures: Tidal owns/holds all the securities mentioned in the article.
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