Micron is undervalued and transitioning to a growth model; target price of $1600+ with intent to buy on dips.

We're back with " Morning Trade Live" to take a look at Micron 's annual chart , which will announce its quarterly results after the market closes today.

The company's shares have risen by more than 500% year-on-year. What an amazing performance. We have retreated from the high summer levels, as we can see here, but we are clearly approaching them again with renewed interest in some semiconductor stocks.

What will " Micron" say tonight? Without a doubt, Micron will deliver excellent figures and positive forecasts.

The question on the minds of all investors is: Is this company still considered a cyclical company? During periods of economic downturn, the company suffered heavy losses. Now, I think that with the increased share of long-term "take-or-pay" contracts that include a minimum price in its revenue mix, the company will remain profitable when the next downturn, which is inevitable, occurs, and perhaps even more profitable than people expect.

It's a transformation process that may not be completed tonight, but we will see it evolve over time until people say, "Oh, this is a growth company, not a cyclical one."

Because right now, regardless of what it will announce, the stock is trading at a price-to-earnings ratio of 6, while the S&P 500 is trading at a ratio of approximately 19. This simply does n't seem logical.

Yes, there is a lot of confusion and I understand what you are saying. I mean, these companies have certainly demonstrated how their businesses have become non-cyclical , thanks to the clear visibility provided by some of those contracts and the pricing power currently available.

What metrics will you be monitoring? Because what I see and hear from analysts , and I spoke with Daniel Newman about this yesterday on "Futureum," is that profit margins will be under intense scrutiny, and there are expectations that we will see figures exceeding 86%.

Yes, this is incredible and we may see higher gross profit margins over time. But again, the crucial point would be: This is great, but has "Micron" reached its peak? We shall see, because it seems to me that no one will be surprised by the strong results and future projections .

They will just say, "Okay, is this the peak this quarter?" Is it in the next quarter? Is it in this fiscal year? Is it in the next fiscal year ?

When people see that businesses are moving more and more towards long-term "consume or pay" contracts, the stock will get a valuation boost. Probably not before then . Last quarter, the company announced in its forecasts that about 20% of its revenue came from these deals I was talking about.

What I'm looking for tonight is guidance for a much higher percentage of those trades, because I think that will be the most important outcome in my view.

Yes, of course, like any analyst who covers the name, and I have been covering this company since its IPO in the 1980s. I look at revenue, gross margin, capital expenditures, past and future profitability, but again, I think the most important thing is—and remember the benchmark was last quarter—their statement that 20% of their revenue was in such long- term deals.

I hope it will be a much higher percentage, not just in this quarter, but also in what they are talking about in the future, which could rise to more than 50% of total revenue, Sam.

In my opinion, that would be the most important disclosure.

Well, something worth following up on. Yes, I know someone who worked for Micron in the 1980s in Boise and now blames himself for not holding onto those shares.

I wonder, then, what this will mean for the stock tomorrow in terms of the reaction in the wider chip sector ? Well, it's always extremely difficult. In the last quarter, when they surprised the market positively, the stock rose, but in previous quarters they had positive figures, sometimes very positive figures, yet the stock was declining.

I am very optimistic, and the stock is trading at just over $1,000 per share . I think the company is worth at least $1600 per share if it is worth anything at all.

So, I'm optimistic, and what I would say to investors is that I don't know enough about buying it before tonight's report, but if the stock drops, I'm likely to buy aggressively.

Good. Um, but with regard to the next big test, I mean the expectations are very high, and we have seen it exceed expectations and yet the reaction has been negative. I mean, what do you think the impact of that is?

I mean, for the broader technology sector, given that this is the last company to announce its results as the earnings season for this quarter comes to a close.

Well, this is certainly a referendum on being the major player in the field of DRAM and SRAM memory for the entire AI infrastructure ecosystem. So, obviously we're all looking forward to it, not because we're Micron analysts specifically, but because of the forecasts that will confirm, and I think will, continued capital expenditure in this area until 2027.

I'm now feeling very comfortable at least until 2028.

Um, implied volatility levels are high , but not as high as they were in the past two quarters. There is still an expectation of a plus or minus 7% movement in the company's shares in one day after the earnings announcement.

But, as you know, that percentage was exceeding 10 to 11% in the last two quarters as the stock rose sharply. So, we've retreated a little . The stock has fallen by about 14% from those record levels we saw in June.

Therefore, this may lend some credibility to the fact that implied volatility levels have decreased.

However, this is still an expensive stock. Therefore , using the options market to create leverage and determine a direction may be the best way to deal with this , given that it requires a large amount of capital if you were to buy the shares directly.

Therefore, I looked at something more conservative where the odds were in my favor, weren't they ? I can make a profit in three out of four different scenarios. Therefore, I looked at an unbalanced "put butterfly" strategy for a downtrend, where I would actually get credit from this difference.

Okay, let 's analyze this deal. It's in the options for the week of October 2nd that expire in just two days. I will buy one put option outside the 1040 price range. I will sell two put options at 1030.

Then I will buy one put option at 990. As a whole, I will get a balance of about $7.50.

So, what does that mean? Above level 1040, any level higher than that I will be able to keep the balance I have accumulated. That is, $750 for each price difference I will keep.

But as you can see here from the risk profile, at the short strike price , where I sold two options at 1030, here I get the maximum profit. So, if we drop after the profits and stay around the 1030 level, the price difference will widen further and I will get the greatest profit.

Now, when do I start losing on this type of trade? Well, the breakeven point in this trade is $1012.50 on the downside. This represents more than 5.5 percent below Micron's current share price .

That is, within the range of one standard deviation priced by the options market.

You have some risk down to the 990 level. That is where your maximum losses are in this trade. But this is a controlled trade with a high probability, as if the stock rises, I will keep the balance.

If the stock price drops slightly, I will maximize my profit. You just don't want this stock to drop by more than approximately 6%. This is the level at which you start to experience losses.

Well, this will be the next big catalyst for these markets after this morning's data. I really appreciate the trading example of Micron stock, which is currently trading higher ahead of tonight's results.